Pricing Effects on Revenue

Overview


Revenue is the amount of money that a firm recieves for selling its product, given by the following equation
{% revenue = q(p) \times p %}
  • {% p %} - price
  • {% q(p) %} - is the quantity demanded (sold)

Pricing Effects


Then, the sensitivity of revenue with respect to changes in price is given by
{% \frac{\partial revenue}{\partial p} = q(p) + p \times \frac{\partial q(p)}{\partial p} %}
It roughly shows the change in revenue if price is increased by one unit. This sensitivity can be broken into two effects.

  • Current Demand Level {% q(p) %} - each item currently being demanded is increased by 1 dollar, and hence the firm receives {% q %} new dollars.
  • The increase in price changes the demand (typically demand goes down) and so there are fewer products being sold (given by {% \frac{\partial q(p)}{\partial p} %})

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