Total revenue (TR) is calculated by multiplying price (P) per
unit and quantity (Q) of the good sold.
TR = P x Q
The total revenue test is a method of estimating the price elasticity of
demand. As Ed will impact the total revenue, we can estimate the Ed by
looking at the movement of the total revenue.
Total Revenue Test
Ed > 1, total revenue will decrease as price increases. P and TR moves in
opposite directions. Producers can increase total revenue ( TR = Price x
Quantity) by lowering the price. Therefore, most department stores will have
sales to attract customers. Apparel's demand is elastic.
Ed < 1, total revenue will increase as price increases. P and TR moves in
the same direction. Producers can increase total revenue by raising the
price. Inelastic demand for agricultural products helps to explain why
bumper crops depress the prices and total revenues for farmers.
You may look at the movement of TR in the example below. It demonstrated
the relationship described above.