>> Say you go out for lunch
and get a sandwich for $6.00.

You may wonder why the
sandwich shop charged $6.00.

Couldn't they have
made more money

if they charged $8.00
or $10.00 or $20.00?

What the shop owner
wants is revenue,

and that's the price per
sandwich times the number

of sandwiches that they sell.

At $20.00 per sandwich,

their customers are going
to go somewhere else.

So the sandwich shop is making
more money per sandwich,

but they're selling
fewer sandwiches.

That means that firms can't
increase their revenue

by raising prices but only
up to a certain point.

At prices above that point,
revenues actually start to fall

because customers
are leaving faster

than the prices are rising.

To understand how prices
affect the firm's revenue,

we have to understand the
consumer's elasticity of demand.

The elasticity of demand is
the ratio of the percent change

in quantity demanded to the
percent change in the price.

If that ratio is less than one,
we say the demand is inelastic.

For example, a 10% increase

in price might only reduce
the quantity demanded by 4%.

If that's the case, the sandwich
shop can make more money

by raising the price
because they don't lose them

any customers.

On the other hand, if that
ratio is greater than one,

we say the demand is elastic.

For example, a 10% increase

in price could reduce
quantity demanded by 18%.

In that case, the sandwich
shop will actually lose money

if they raise their price

because they lose
so many customers.

And here's the tricky
thing, the elasticity

of demand is different

at different points
on the demand curve.

That's why the store can
increase their revenue

by raising prices only
up to a certain point.

After which, further price
increases reduce revenue

by cutting the quantity bought.

A smart store manager has a
good sense of the elasticity

of demand for their
product, and you can bet

that influences the
price they choose.