|Posted on April 14, 2014 at 8:20 PM|
The total revenue test is a great way to estimate whether a good's demand is price elastic or inelastic. You need to see how the price changes relative to total revenue (price x quantity).
If price and total revenue move in opposite directions, consumers are responsive to changes in price and demand is price elastic (Ed>1). If price and total revenue move in the same direction, consumers are not very responsive to the change in price and demand is price inleastic (Ed<1). If total revenue is constant when the price changes, then demand is unit elastic (Ed=1).
AP Microeconomics Unit 1 Basic Economic Concepts