Calculate how a change in price and quantity affects total spending and sales revenue.
Consumer expenditure is the amount buyers spend: price paid multiplied by quantity bought. Producer revenue is the amount sellers receive: price received multiplied by quantity sold. When buyers pay the same price that sellers receive, these totals are equal. A tax or subsidy can create a difference between the two prices, sometimes called a wedge; that is excluded from this example. Use the quantity actually traded and keep the period consistent. When price and quantity both rise, revenue rises; when both fall, revenue falls. If they move in opposite directions, calculate both totals or compare their relative changes. Revenue is not profit: profit also depends on total cost. Elasticity provides a further way to analyse responsiveness in the next chapter.
- Calculate both totals
- Consumer expenditure is what buyers spend: price paid x quantity bought. Producer revenue is what sellers receive: price received x quantity sold. The totals are equal when buyers pay the same price that sellers receive.
- Compare price and quantity together
- If both rise, revenue rises. If both fall, revenue falls. If one rises and the other falls, their relative changes determine the result.
- Keep revenue separate from profit
- Profit = total revenue - total cost. Revenue figures alone do not show how profit changed.
Worked example: A lower price and more sales
A cafe initially sells 80 drinks a day at $6 each. After a supply increase, it sells 110 drinks a day at $5 each. Buyers pay the same price that the cafe receives, with no tax or subsidy changing it. No cost figures are provided.
- Initially, daily consumer expenditure and producer revenue are $6 x 80 = $480.
- After the change, both are $5 x 110 = $550 per day.
- Total spending and revenue rise by $70 per day. The extra sales more than offset the lower price in this example.
- This does not establish the change in profit. Profit = total revenue - total cost, and total cost is not given.
Watch out for this
A higher selling price always gives the producer more revenue and profit.
Revenue depends on both price and quantity sold. Profit then subtracts total cost. A price change alone establishes neither outcome.
Check your understanding
A shop sells 50 notebooks per week at $4 each, then 70 at $3 each. No cost figures are given. Which conclusion is supported?
- Revenue falls because the notebook price falls.
- Revenue rises by $10 per week; the profit change is unknown.
- Revenue and profit both rise by $10 per week.