Elasticity and Revenue We can get the total revenue by multiplying the price into quantity.

In addition, if we know the price elasticity demand, it is easier for us to know what will happen to the total revenue when price changes. When demand is price-inelastic, a price decrease reduces total revenue. A price increase, on the other hand, raises total revenue. When demand is price-elastic, a price decrease increases total revenue. A price increase decreases total revenue. In the borderline case of unit-elastic demand, a price decrease leads to no change in total revenue. Price Elasticity of Supply - it measures the percentage in quantity supplied divided by the percentage change in price. The formula in measuring the price of elasticity demand is also applied in computing for the price elasticity of supply. Applications of Price Elasticity of Demand The price elasticity of demand can be applied to a variety of problems in which one wants to know the expected change in quantity demanded or revenue given a contemplated change in price. To further our understanding of the applications of price elasticity of demand, let us take a look at the following example: The Land Transportation Offices registration authority considers a price hike in personalized "vanity" license plates. The current annual price is P1000 per year, and the registration office is considering increasing the price to P1500 per year in an effort to increase revenue. Suppose that the registration office knows that the price elasticity of demand from 1000 to P1500 is 1.3. Because the elasticity is greater than one over the price range of interest, we are aware that an increase in price would actually decrease the revenue collected by the LTO. Thus, the price hike would be unwise. Factors Influencing the Price Elasticity of Demand The price elasticity of demand for a particular demand curve is influenced by the following factors: Availability of Substitutes. The greater the number of substitute products, the greater the elasticity. Degree of Necessity or Luxury. Luxury products tend to have greater elasticity than necessities. Some products that initially have a low degree of necessity are habit forming and can become necessities to some consumers. Proportion of Income Required by the Item. Products requiring a large portion of the consumers income tend to adjust their behavior to price changes. For example, if Isko is spending half of his allowance in buying call cards for his mobile phone, a sudden increase in the price of sending SMS will drastically affect his demand for call cards. On the other hand, an increase in the price of sliding folders (which Isko buys once every semester) will not significantly affect his demand for it as compared to his demand for call cards. Consideration of Time Period. Elasticity tends to be greater over the long run because consumers have more time to adjust their behavior to price changes. In the long run, consumer learns various ways on how to respond or cope with a price change. As with our example above, Isko would likely reduce the number of SMS he sends or think of other cost-efficient ways on how to connect with his friends over a period of time. His response to the price increase (which is a decrease in his demand for call cards) would be more intense as he learns coping strategies in the days that pass by. Permanent or Temporary Price Change. A one-day sale could result into various responses than a permanent price decrease of the same magnitude.