We have seen that a change in the price pushes the sales revenue in two ways -- increasing revenue per unit but decreasing the number of units sold. Elasticity is a key to understanding this relationship.
Example: Demand for public transportation is inelastic -- probably about 0.3. So, when the price is raised by 1%, quantity demanded declines by only three-tenths of 1%, and revenue increases by seven-tenths of 1%.
Example: The demand for computers is elastic. Suppose (this is a guess) that the demand for computers is 2. Then a 1% cut in the price of computers would increase the number of computers sold by 2%. Revenue would increase approximately by the difference - 2%-1% = 1% increase in the sales revenue every time the price of computers drops by 1%.
We see that the difference from an elasticity of 0.3 to an elasticity of 2.0 makes all the difference. When elasticity is 0.3, the price and the revenue change in the same direction, whereas if elasticity is 2, they change in opposite directions. In the second case -- elasticity of 2.0 -- the increase in sales more than offsets the decrease in price, but in the first case, elasticity of 0.3, the increase in sales is too small to offset the decrease in the price.
