Does Raising Price Bring in More Revenue? Imagine that a band on tour is playing

Question

Does Raising Price Bring in More Revenue? Imagine that a band on tour is playing in an indoor arena with 15,000 seats. To keep this example simple, assume that the band keeps all the money from ticket sales. Assume further that the band pays the costs for its appearance, but that these costs, like travel, and setting up the stage, are the same regardless of how many people are in the audience. Finally, assume expensive for some seats than for others, but the calculations become more complicated.) The band knows that it faces a downward-sloping demand curve; that is, if the band raises the ticket price and, it will sell fewer seats. How should the band set the ticket price to generate the most total revenue, which in this example, because costs are fixed, will also mean the highest profits for the band? Should the band sell more tickets at a lower price or fewer ticketsat higher price? The key concept in thinking about collecting the most revenue is the price elasticity of demand. Total revenue is price times the quantity of tickets sold. Imagine that the band starts off thinking about a certain price, which will result in the sale of a certain quantity of tickets. The three possibilities are in Table 5.3. If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold thus raising total revenue. However, if demand is inelastic at that original quantity level, then the band should raise the ticket price, because a certain percentage increase in price will result in a smaller percentage decrease in the quantity sold-and total revenue will rise. If demand has a unitary elasticity at that quantity, then an equal percentage change in quantity will offset a moderate percentage change in the price-so the band will earn the same revenue whether it (moderately) increases or decreases the ticket price. that all the tickets have the same price. (The same insights apply if ticket prices are more If Demand Then .. Therefore Is Elastic l "y change in Qd > change in P | A given % rise in P will be more than offset by a larger Unitary | % change in Qd m % change in P | A given % rise in P will be exactly offset by an equal % m nelastic. IS change inOd i hangen P A ven% rise in p will cause a smaller fall in Q so % fall in Q so that total revenue (P falls. fall in Q so that total revenue (P x Q) is unchanged that total revenue (P x Q) rises Table 5.3 Wll the Band Earn More Revenue by Changing Ticket Prices?

Explanation / Answer

The attached example provides clear insight on the price elasticity of demand with PED being elastic, unitary and inelastic. My key learning from here is that the PED can be aapplied to almost each scenario in life and decision making. Be it individual or business decision making.

The mention of a downward-sloping demand curve is also interesting as it puts into perspective the impact of an increase in ticket price on sales.

In the given case, since the demand curve is downward sloping, an increase in ticket price will translate into lower number of seats sold.

However, since fixed costs need to be covered, the band is likely to lower ticket prices to maximize revenue. The key learning here is that profit maximization idea might not always work. The process is to identify the type of demand and calculate the profit maximiation and revenue maximization impact.

A question that comes to mind is the impact of shift in the demand curve to the right or left and the factors that might shift the demand curve.

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