2.5.3—PED diagrams and revenue

PED predicts how a price change affects total revenue.

When demand is elastic, quantity changes proportionally more than price; when inelastic, price changes dominate revenue.

Example

A 10% price rise with a 20% quantity fall reduces revenue because the 2× quantity response outweighs price.

Compare percentage changes rather than assuming every price rise raises revenue.

The unit-elastic case leaves revenue approximately unchanged only under the stated local conditions.

Classification and revenue map using $|PED|$: perfectly inelastic $=0$ (vertical), inelastic $0<|PED|<1$, unit elastic $=1$, elastic $|PED|>1$, and perfectly elastic tends to infinity (horizontal). If demand is elastic, price and total revenue move in opposite directions; if inelastic, they move together; at unit elasticity, a small price change leaves total revenue unchanged.