Dr. D. Kay wants to increase his revenue. He is thinking about raising his prices. He
sees 4 patients per hour no matter what so he has a constant cost of $400 per hour. Dr. D
Kay’s demand for his services is shown. He charges $150.00 per patient.
If Dr. D. Kay is at point A, he is charging $600 per hour and seeing 8 patients in 2 hours.
His total revenue is $1,200.00 for a profit of $400.00.
What happens if Dr. D. Kay raises his price to
$700.00 per hour? His total revenue FALLS and
so does his profit. His total revenue is $700.00
and his total cost is $400.00 for a profit of
$300.00. Dr. Kay should not raise prices.
What if Dr. D. Kay lowers his price to $500.00
per hour? The good doctor would increase his
revenue to $1,500.00 but his profit would fall to
Dr. D. Kay should keep his price right where it is
Dr. Kay could see more patients and perhaps do more good by working four hours.
However, his profits are maxed by working two hours. Does this explain why doctors
aren’t open on weekends and Fridays?
A good is elastic in the range of demand when total revenue increases when the price
decreases or total revenue falls when the price increases.
Elas1 (0) Total Revenue Test
In the table below, compute the total revenue by multiplying price and quantity for each
price and quantity. Next, circle “E” if the price is elastic, “U” if the price is unit elastic,
and “I” if the price is inelastic.
Sample 2. In AP Microeconomics, three factors influence how elastic the response is
to an increase in price. They are 1) Time 2) Percentage of Budget Spent on the Good 3)
The Number of Substitutes for the Good. For example, the need for air conditioning is
more elastic in winter where the temperatures are below zero than in summer when t