Final Answer:
When demand increases (
), total revenue (TR) generally rises, assuming the demand is elastic. In elastic conditions, the percentage increase in quantity demanded outweighs the percentage decrease in price, resulting in a net revenue increase.
Step-by-step explanation:
In economic terms, total revenue (TR) is calculated by multiplying price (P) and quantity (Q), expressed as TR = P * Q. When demand increases (
), it implies a simultaneous rise in both price and quantity demanded.
If demand is elastic, meaning the percentage change in quantity demanded is more responsive than the percentage change in price, the total revenue experiences growth. This is due to the fact that the increase in quantity demanded compensates for the decrease in price, leading to a net positive effect on total revenue.
Conversely, inelastic demand conditions may yield a decrease in total revenue despite an increase in quantity demanded. In this scenario, the percentage change in quantity demanded is less responsive than the percentage change in price, resulting in a net reduction in total revenue. Therefore, understanding the elasticity of demand is crucial in predicting the impact of changes in price and quantity on total revenue.
Elasticity coefficients, represented by the symbol ε, quantify this responsiveness. If ε > 1, demand is elastic; if ε < 1, demand is inelastic. Calculating elasticity provides a precise understanding of how changes in price and quantity affect total revenue, enabling businesses and policymakers to make informed decisions.