Total Revenue (TR) and Elasticity (With Diagram)!

It may be recalled that the demand for a commodity is said to be price elastic if total reve­nue increases (falls) as price increases (falls). And if TR remains constant whether P falls or rises, de­mand is said to be unitary elastic.

We have noted that the slope of the demand curve is not the same as its elasticity. However, only in two situations we can calculate elasticity from slope alone, viz., completely elastic demand (a horizontal straight line in which case dP/dQ = 0) and completely inelastic demand.

In Figure 10.7 we have shown a perfectly elastic demand curve. In figure 10.10 we show an exactly opposite type of de­mand curve, viz., a perfectly inelastic (a vertical straight line) demand curve. In this case an un­changed quantity can be sold at all possible prices (such as OP0, OP1, etc.). This usually happens in case of highly necessary goods like cigarettes, salt or life-saving drugs.

When the prices of such products fall, there is not much fall in quantity demanded. This is why the Finance Minister often imposes high rates of sales tax or excise duty on such goods. The tax is initially imposed on the producer but is subsequently passed on to the consumer in the form of higher price.

In fact, values of price elasticity can be in the range 0 to – ∝ Values from 0 to -1.0 lie in the ine­lastic zone of the demand curve. In this zone per­centage increases in Q (which raise revenue) are not as great as the corresponding percentage decreases in P (which lower revenue). Therefore, TR falls as price is reduced. Look at the following demand and corresponding TR curves.

Three points are illustrated by Figure 10.11.