Elasticities of Demand and Supply Practice Test

The main idea is how total revenue responds to a price change, based on the price elasticity of demand. Total revenue is price times quantity (TR = P × Q). When demand is inelastic, the percentage drop in quantity demanded is smaller than the percentage increase in price (the elasticity's magnitude is less than 1). That means the higher price boosts revenue more than the loss from selling fewer units, so total revenue goes up.

For example, if the price rises by 20% but quantity falls only 10%, revenue changes from P×Q to 1.20P × 0.90Q = 1.08P×Q, an 8% increase. That’s why a price rise with inelastic demand increases total revenue.

If demand were elastic, the drop in quantity would be proportionally larger than the price increase, causing total revenue to fall. The notes about income or normal/inferior goods describe shifts in demand, not the immediate impact of a price change on total revenue.