Before a firm increases or decreases the price of its product, it needs to determine how a price change will affect its total sales revenue. If demand is elastic, a decrease in price will result in an increase in total revenue because even though a lesser price is being received per unit, enough additional units are being sold to more than make up for the lower price. However, if demand is inelastic, a price decrease will cause total revenue to decrease. The modest increase in sales will be insufficient to offset the decline in revenue per unit, and the total revenue declines. Elasticity typically varies over the different price ranges of the same demand curve; demand tends to be more elastic in the upper-left portion than in the lower-right portion. At midpoint (unitary elasticity), where the percentage change in quantity is exactly equal to percentage change in price, total revenue does not change.
According to an article, “NB Liquor profits rise 1.3%; Retail Price increases offset lower sales volume as consumers spend less, beer purchases go flat” written by Chris Morris at Telegraph-Journal on Sep 29, 2011, NB Liquor agency reported higher profits despite an overall drop in sales for the fiscal year ending in March 31, 2011. “The Crown corporation raised a number of prices during the year, helping boost the value of total sales by 1.3 per cent over the previous year to $412.4 million”.
As seen above, when the price is below the midpoint; demand is inelastic, if the price rises, the total revenue will increase. This article shows that if demand is inelastic, a price increase will cause total revenue to increase.
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