Elasticity and Revenue

Impact of Elasticity of Demand on Price in the Hearing Aid Market

Source : http://www.audiologyonline.com/articles/article_detail.asp?article_id=1757

Below is a an example of the relationship between price elasticity and total revenue. The graph is from the source above. The relationship between the two is the for revenue to increase, price has to increase. Price is elastic to revenue because when price increases, total revenue will drop because demand is down.

Below is a chart from the article of how demand can be both elastic & inelastic to pricing.



This article is based on the impact of elasticity in the hearing aid industry. The elasticity of a products demand has to do with their substution products. This is the leading determinant. As stated in the article, "A market having a large number of substitutes—such as over-the-counter pain and fever medications—generally lends to an increase in responsiveness by consumers (i.e., elasticity) as price changes." This just means that perhaps a customer is looking for birth control, and they usually get "Yasmin." for about $15. The next time that they go into the pharmacy, this birth control doubles the price and is now $30. The customer would likely ask the pharmasist for other brands, lets say "Plan B" which is $15 dollars. The customer might switch brands and try "Plan B" because its now cheaper. So now the demand for "Yasmin" has decreased, which makes the elasticity of the price to come into affect immediatetly. Now, the price of "Yasmin" would decrease, hopefully making the total revenue increase due to decrease of price.