WEBVTT

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So we're going back to
our little burger stand

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where we had our demand curve
in terms of burgers per hour.

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And now, I want to
think about something

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from the perspective
of our burger stand.

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And think about,
at any given point

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on this demand curve, how much
revenue would we get per hour.

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And when I talk about revenue,
for simplicity, let's just

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think that's really just
how much total sales will

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I get in a given hour.

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So let me just write
over here total revenue.

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Well, the total
revenue is going to be

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how much I get per burger times
the number of burgers I get.

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So the amount that I
get per burger is price.

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So it's going to
be equal to price.

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And then the total number
of burgers in that hour

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is going to be the quantity.

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Pretty straightforward.

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If I sell 10 things
at $5, I am going

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to get $50 of revenue,
$50 of sales in that hour.

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Now, let's think about
what the total revenue will

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look like at different
points along this curve

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right over here.

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And actually, let me just
make a table right over here.

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So I'll make one column
price, one column quantity.

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And then let's make one
column total revenue.

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So let's look at a
couple scenarios here.

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Well, we could actually
look at some of these points

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that we already have defined.

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At point A over
here, price is 9.

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So I'll do it in
point A's color.

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Prices is 9.

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Quantity is 2. $9 times
2 burgers, $9 per burger

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times 2 burgers per hour.

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Your total revenue
is going to be $18.

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And you can see it
visually right over here.

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This height right
over here is 9.

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And this width right
over here is 2.

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And your total
revenue is going to be

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the area of this rectangle.

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Because the height is the price.

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And the width is the quantity.

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So that total revenue is
the area right over there.

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Now, let's go to point--
let me do a couple of them

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just to really make
it clear for us.

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Let's try to point
B. So at point B

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when our price is 8 and our
quantity is 4, 4 per hour.

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Our total revenue is
going to be 8 times 4

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which is $32 per hour.

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And once again, you
can see that visually.

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The height here is 8.

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And the width here-- so the
height of this rectangle is 8.

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And the width is 4.

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The total revenue is
going to be the area.

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It's going to be the height
times the width just like that.

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Now, let's go to a point that I
haven't actually graphed here.

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Actually, let me
just-- actually,

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I'll go through all the
points just for fun.

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So now at point C, we have 5.50.

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5.50 is a price.

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The quantity is 9.

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9 times 5.50.

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9 times 5 is $45.

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And you have another 4.50.

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So that is 49.50.

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So once again, it's going to
be the area of this rectangle.

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Area of that rectangle
right over there.

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So you might already be
noticing something interesting.

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As we lower the price, at least
in this part of our demand

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curve, as we lower the
price, we are actually

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increasing not just
the quantity were

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increasing the total revenue.

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Let's see if this
keeps happening.

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So if we go to point D, I'll
do it in that same color.

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We have 4.50.

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And we are selling 11 units.

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So 11 times 4.50.

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Let's see, this is going
to be 44 plus 5.50.

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Once again, that is 49.50.

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So that this rectangle is
going to have the same area

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as that pink one that we
just did for scenario C.

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And I'll actually just
do one more down here,

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just to see what happens.

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Because this is interesting.

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Now we lower the price.

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And it looks like things
didn't change much.

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And now, let's go-- let's
just do one more point

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actually for the sake of time.

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Point E. And I encourage
you to try other ones.

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Try F on your own.

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Point E, my price
is $2 per burger.

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My quantity is 16
burgers per hour.

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I sell a total of 32 burgers.

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Now actually, let's
just do the last one, F,

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just to feel a
sense of completion.

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So $1 per burger.

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I sell 18 burgers per hour.

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My total revenue, when you
multiply them, is $18 per hour.

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And once again, that's the
area of this rectangle,

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this short and fat
rectangle right over here.

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And E was the area--
the total revenue in E

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was the area of that
right over there.

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And you could graph
these just to get

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a sense of how total
revenue actually

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changes with respect
to price or quantity.

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Lets plot the total revenue
with respect to quantity.

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So let's try it out.

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So if you-- let me plot it out.

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So this is going to
be total revenue.

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And this axis right over
here is going to be quantity.

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And we're going to, once
again, go from-- let's see.

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This is 0.

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This is 5.

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This is 10.

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This is 15.

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And this is 20 right over here.

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And then total revenue.

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Let's see, it gets as high--
it gets pretty close to 50.

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So let's go.

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This is 10 20, 30, 40, and 50.

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So that's 50, 40,
30, 20, and 10.

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So when our quantity is
2, and our price is 9.

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Well, we don't have price on
this axis right over here.

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But when our quantity is
2, our total revenues 18.

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So it's going to be
something like there.

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Then, when our quantity is
4, our total revenue is 32.

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Right about there.

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Then, when our quantity is 9,
our total revenue is almost 50.

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So right over there.

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And then, when
it's 11, it's also

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at that same point
right over there.

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And then, when we are quantity
is 16, our total revenues 32.

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16.

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So 32.

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Right there.

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And then finally, when
our quantity is 18,

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our total revenue is 18.

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And what you see is
that it's plotting out

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a curve that looks like this.

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And if you remember
some of your algebra 2,

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this is a concave downwards
parabola right over here.

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And you can see
there was actually

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some point at which you could
maximize your total revenue.

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And if you really tried
all the points here,

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you would see that
maximum point is

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if you tried this point
right over here, right

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at price 5 and quantity 10.

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At price 5 and quantity 10, in
that hour, you would sell $50.

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So this is the maximum
point right over there $50.

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Now, the whole reason why
I'm talk think about this.

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I could have talked about this
independently of any discussion

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of elasticity just to see how
total revenue relates to price

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and quantity at different
points on the demand curve.

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But there is an
interesting relationship.

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In that very first
video, and we actually

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used this exact
demand curve for it.

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When we explored
elasticity, we saw

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that up here at this
part of the curve--

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let me do this in
a different color.

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At this point of the curve in
orange for any change-- when

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you do a change in your price
since the prices are pretty

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high, that is a much
lower percent change

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in price than the impact
that you get on quantity.

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Because over here, although
they look like they're close.

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Or I should say the absolute.

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For every 1 that down
we move in price,

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we're moving 2 up quantity.

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But that 1 down in price is a
very small percentage of price

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because our prices
are high here.

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And it's a very large percentage
of quantity right over here.

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So you get huge changes
in percent quantity

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for very small changes in price
in this part of the curve.

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So this part of the
curve is elastic.

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Or you could say that its
price elasticity for demand

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is greater than 1.

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You get larger changes
in percent quantity

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for a given change
in percent price.

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Now, these parts of the
curve down here, we saw

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is the opposite's happening.

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You move 1 down, 1
unit down in price,

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you move 2 units to
the right in quantity.

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But over here, price
is a much lower.

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So this is a much larger
percentage change in price.

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And this is a much smaller
percentage change in quantity.

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So you get large
percentage changes

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in price for small percentage
change in quantity.

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That means that here, you
are relatively inelastic.

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And then right over here,
right at this point,

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right in this region,
right over here,

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we saw that we
had unit-- we were

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unit elastic right over there.

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So there's an interesting
relationship going on.

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While we were, so
while we were elastic,

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this part right over
here, when we lowered

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price in this region.

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While we were elastic,
when we lowered price,

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we got increases in revenue.

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So let me write this down.

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And this is generally,
too, there's

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a couple of boundary
cases on the math that

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make it a little bit, you
can't make it absolutely true.

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But while we are elastic, at
the elastic points of our demand

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curve, a decrease in price.

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Price goes down.

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Total revenue was going up.

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You do a price cut on this
part of the demand curve,

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you get more revenue.

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Then, when you are at unit
elasticity, what was happening?

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At unit elasticity, you were
right at this point right

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over here.

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Right at this point over here.

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And roughly, when
you do a price cut--

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and I'm going to say
this is roughly true--

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your total revenue
stays constant.

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But just right at
that point, right

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when you're going through
that unit elasticity point.

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And then finally, when you are
inelastic when a large percent

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changes in price result and
not so large percent change

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is in quantity demanded, then
a price change going down

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resulted in lower total revenue.

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Resulted in total
revenue going down.

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And this should, hopefully,
make a little bit

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of intuitive sense.

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Because over here, this
point, if given percent

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change in price, you were
getting a larger percent

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change in quantity.

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So the percent in
price went down.

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Your percent in
quantity grew even more.

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So you made up any
decrease in height

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with a increase in width.

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So your area increased.

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Down here, your decrease
in percent price

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wasn't made up for a
decrease in quantity.

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So when you made your
rectangles little bit shorter,

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you didn't, we weren't
able to compensate

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by growing the width as much.

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And so you actually had a lower
area, lower total revenue.