question archive What's the relationship between elasticity and total revenue?
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What's the relationship between elasticity and total revenue?
Elasticity affects the effectiveness of a pricing strategy and taxation policies. For a firm that seeks to maximize total revenue understanding the elasticity of demand is essential. For goods with inelastic demand such as necessity products and prescribed medication, the prices can be increased without a firm realizing significant changes in the amount purchased. This increases the total revenue collected. Taxes imposed on habitual products such as cigarettes lead to high government revenue since the quantity demanded does not change. Therefore the higher the elasticity, the lower the revenue collected, and the lower the elasticity, the higher the total revenue.