A price cut will increase the total revenue a firm receives if the demand for its product is elastic.
When we say that something has an “elastic” demand, it means that people are willing and able to buy more of it at a lower price than they were before.
For example, when stores have sales, usually people flock to them in droves because they know there are great deals to be had!
This is because their demand curve becomes elastic; as long as the store offers products at prices cheaper than other places around town (or even online!).
Consumers will happily pay those higher prices while waiting in line for hours just to get those good deals.
If, on the other hand, a company’s product has an “inelastic” demand curve (i.e., its consumers are not willing or able to buy more of it at a lower price),.
Then that means people will stop buying if prices go down and they’ll only continue buying as long as you keep raising your prices again.
For example, when gas stations have sales for gasoline during these summer months where we’re all driving our cars around town everywhere trying to find cheaper gas somewhere else.
Or even waiting in line hours just to get one gallon of fuel! This is because their demand curve becomes inelastic; once someone stops filling up with gas altogether (whether by choice or out of necessity) there’s no point in paying.
