
If the price elasticity of demand is 2 and a firm raises its price by 20 percent, the total revenue will


The price elasticity of demand (PED) measures how much the quantity demanded of a good responds to a change in its price. It is defined as:

\[
\text{PED} = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}
\]

Given that:

- The price elasticity of demand (PED) is 2.
- The firm raises its price by 20%.

To find the percentage change in quantity demanded:

\[
\% \text{ Change in Quantity Demanded} = \text{PED} \times \% \text{ Change in Price} = 2 \times 20\% = 40\%
\]

Since the elasticity is positive (PED > 1), the demand is elastic, meaning that the percentage change in quantity demanded is larger than the percentage change in price. Specifically, a 20% increase in price leads to a 40% decrease in quantity demanded.

### Effect on Total Revenue:

Total revenue is calculated as:

\[
\text{Total Revenue} = \text{Price} \times \text{Quantity}
\]

With elastic demand (PED > 1), an increase in price leads to a proportionally larger decrease in quantity demanded, causing total revenue to decrease.

**Conclusion: The total revenue will decrease.**

Would you like further details or have any questions?

### Related Questions:
1. What happens to total revenue when demand is inelastic, and price increases?
2. How does a PED value of 1 affect total revenue with price changes?
3. How would the total revenue change if the PED was 0.5 and the price increased by 20%?
4. What factors can influence the price elasticity of demand?
5. How does elasticity affect pricing strategies in competitive markets?

**Tip:** Elastic demand means that consumers are sensitive to price changes, so raising prices can reduce total revenue.

If the price elasticity of demand is 2 and a firm raises its price by 20 percent, the total revenue will

Understand how a 20% price increase affects total revenue when the price elasticity of demand is 2. Learn key economic concepts such as elasticity, total revenue, and the impact of price changes. Ideal for Grades 10-12 students studying economics.

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