Total Revenue Test
What is Total Revenue Test?
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.
Total Revenue Test: a worked example
A school store sells 200 hoodies at $40, so total revenue is 200 × $40 = $8,000. Cut the price to $35 and 260 hoodies sell, giving 260 × $35 = $9,100. Revenue rose $1,100 while price fell, so demand is elastic across that range. The coefficient agrees: quantity rose 60 ÷ 200 = 30 percent while price fell 5 ÷ 40 = 12.5 percent, and 30 ÷ 12.5 = 2.4. Cut again to $30 and only 280 sell. Revenue is 280 × $30 = $8,400, down $700 from $9,100, so demand is inelastic here. Checking again, quantity rose 20 ÷ 260 = 7.7 percent against a price drop of 5 ÷ 35 = 14.3 percent, and 7.7 ÷ 14.3 = 0.54. One demand curve, elastic in the first range and inelastic in the second.
The mistake students make with total revenue test
Students memorize the headline result as a universal rule and write that a price cut always raises total revenue, because the elastic case is the one worked first in class. Direction is the entire test. Revenue rising after a price cut means elastic demand, revenue falling means inelastic demand, and one demand curve routinely delivers both verdicts at different prices. A second error is calling the revenue maximizing price the profit maximizing price. Total revenue ignores the cost of making the extra units, so the profit maximizing price sits higher whenever marginal cost is positive.
Total Revenue Test questions
How does the total revenue test tell you demand is elastic?
Compare the direction of the price change with the direction of the revenue change. When price and total revenue move in opposite directions, demand is elastic, because the percentage change in quantity outweighed the percentage change in price. When the two move together, demand is inelastic. When revenue holds steady, demand is unit elastic. The test needs only two price and quantity observations, which makes it faster than computing a full coefficient under exam pressure.
Does the total revenue test work for supply?
Supply cannot be classified this way. Along an upward sloping supply curve a higher price brings a larger quantity supplied, so price times quantity always rises no matter how responsive producers are. The direction of the revenue change therefore carries no information about the size of the elasticity. Use the formula instead, dividing the percentage change in quantity supplied by the percentage change in price, and compare the result with 1.
At what price is total revenue highest on a linear demand curve?
Total revenue peaks at the midpoint of a straight line demand curve, where the coefficient equals 1. Above that midpoint the curve is elastic, so cutting price raises revenue. Below it the curve is inelastic, so cutting price lowers revenue. A seller moving toward the midpoint from either side gains revenue, which is why the total revenue curve is a hill that tops out at the quantity where marginal revenue crosses zero.
Formula / Example
This is the live Elasticity sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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