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State the relationship between TR and price elasticity of demand.

State the relationship between TR and price elasticity of demand.

Solution

Since total revenue equals price times quantity (TR = P × Q), which is the same as the consumer's total expenditure, its response to a price change reveals the elasticity of demand — this is Marshall's total outlay method.

  1. Elastic demand (Ep > 1): TR moves opposite to price — a price fall raises TR and a price rise lowers it.
  2. Unitary elastic demand (Ep = 1): TR stays constant whatever happens to price.
  3. Inelastic demand (Ep < 1): TR moves in the same direction as price — a price rise raises TR and a price fall lowers it.

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