Impact on Total Expenditure

Consumers' total expenditure is the same as total revenues from the suppliers' point of view. One of the most important applications of price elasticity is determining how total consumer expenditure on a product changes when the price changes.

Total Revenues = Total Expenditures = Price x Quantity

According to the law of demand, price and quantity move in opposite directions. When the price changes, total revenue also changes. But a rise in price doesn't always increase total revenue. The change in total expenditures depends on whether the effect of the changes in price or the effect of the changes in quantity is greater.

• When demand is inelastic, a change in price will cause total expenditures to change in the same direction.
• When demand is elastic, a change in price will cause total expenditures to move in the opposite direction.
• When demand elasticity is unitary, total expenditures will remain unchanged as price changes.

Because of the relationship between price and quantity sold, a firm's total revenue can rise, fall or stay the same in response to a change in price. The outcome is determined by the price elasticity of demand. This conclusion is similar to that of total expenditures.

Note that firms attempt to maximize profit (total revenue minus total cost), not revenue.