Price Elasticity of Demand vs Total Revenue Test
Price Elasticity of Demand and Total Revenue Test are two Elasticity concepts in AP Economics that students often mix up. In short: price elasticity of demand is price elasticity of demand measures how responsive quantity demanded is to a change in the good's price. Meanwhile, total revenue test is the total revenue test uses how total revenue responds to a price change to tell whether demand is elastic or inelastic. Here is how they compare side by side.
Price elasticity of demand measures how responsive quantity demanded is to a change in the good's price.
It is the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value is greater than 1 and inelastic when it is less than 1. Goods with many substitutes, that take a large share of income, or judged over a longer time horizon tend to be more elastic.
The total revenue test uses how total revenue responds to a price change to tell whether demand is elastic or inelastic.
If cutting price raises total revenue, demand is elastic; if cutting price lowers total revenue, demand is inelastic. If total revenue is unchanged, demand is unit elastic. When demand is elastic, price and total revenue move in opposite directions.
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