What effect will an increase in price have on the total revenue of a firm whose product has inelastic demand? total revenue will

Step 1: Analyze the question We are asked what happens to total revenue (TR) when a firm raises the price of a product with inelastic demand.

Step 2: The concept Total revenue = Price × Quantity demanded (TR = P × Q)

Price elasticity of demand (PED) measures how much quantity demanded responds to a price change:

• Inelastic demand (PED < 1): quantity demanded changes by a smaller percentage than price.
• Elastic demand (PED > 1): quantity demanded changes by a larger percentage than price.
• Unitary elasticity (PED = 1): the percentage changes are equal.

Step 3: Solution Suppose price rises by 10% and demand is inelastic, so quantity demanded falls by only, say, 4%.

• Price effect: +10% (pushes revenue up)
• Quantity effect: -4% (pushes revenue down, but by less)

The gain from the higher price outweighs the loss from fewer units sold, so TR rises.

Numerical check:

• Before: P = ₦100, Q = 100, so TR = ₦10,000
• After: P = ₦110, Q = 96, so TR = ₦10,560

Total revenue increased.

Summary table

| Demand type | Price increase | Price decrease | |---|---|---| | Inelastic | TR rises | TR falls | | Elastic | TR falls | TR rises | | Unitary | TR unchanged | TR unchanged |

Step 4: Answer Total revenue will increase.

Step 5: Exam tip Remember: "Inelastic: price and revenue move in the SAME direction." Price up means revenue up. For elastic demand, they move in opposite directions. This is why governments tax inelastic goods like fuel, cigarettes and alcohol: demand stays steady and revenue rises.