C03 · Lesson 2 of 22 · 14 min · 5 hands-on tasks
Elasticity and Revenue
The finance director wants every price up 10% to grow revenue. Will it work? Measure how sensitive customers are to price (elasticity), see where a price rise adds revenue and where it loses it, and find the customers who are very different from the average.
🎬 Situation
Rosa's demand line is in: tickets = 2,400 − 100 × price for a typical cinema week. At $12, that's 1,200 tickets and $14,400 of ticket revenue.
Now the finance director, Mateo, wants to raise prices 10% across the board: "More money from the same customers."
Will revenue really grow? It depends on one number: how sensitive customers are to price.
🎮 Play
Move the price and watch revenue. The elasticity tells you, at each price, whether a rise would gain or lose revenue.
Inelastic here (below 1): a higher price would ADD revenue. Customers barely react.
Measure an elasticity from a test. Last month the popcorn price went from $6 to $7. Work out how sensitive popcorn buyers are.
| A | B | C | D | |
|---|---|---|---|---|
| 1 | ||||
| 2 | ||||
| 3 | ||||
| 4 | ||||
| 5 |
- D2: % change in price = (after − before) ÷ before, =(C2-B2)/B2
- D3: % change in tubs sold (copy D2 down)
- B5: elasticity = % change in tubs ÷ % change in price, =D3/D2
- D4: % change in revenue (copy down once more)
🏷️ Name it
| Term | Meaning | Northlight |
|---|---|---|
| Price elasticity of demand | % change in quantity ÷ % change in price (shown as a positive number) | 1.0 at $12 |
| Elastic (above 1) | Very price-sensitive: a rise loses revenue | Student Tuesdays: 2.0 |
| Inelastic (below 1) | Not very sensitive: a rise gains revenue | Popcorn 0.3, weekend evenings 0.6 |
| Unit elastic (1) | Revenue at its peak | $12 on the line |
| Cross-price elasticity | % change in our sales ÷ % change in a rival's price | Starplex: 0.3 (weak substitutes) |
| Income elasticity | % change in sales ÷ % change in income | Cinema trips rise with income; budget brands fall |
For a straight line, elasticity at a point = slope × price ÷ quantity. With Northlight's line: 100 × P ÷ (2,400 − 100P).
What makes demand elastic: many close substitutes, a big share of the budget, time to shop around, easy price comparison. Inelastic: no substitutes, urgent need, small cost, habit, or a captive customer (popcorn inside the cinema).
🖍️ Like you're five: if lemonade gets a bit dearer and your friends all go to the stand next door, they're elastic. If you're the only stand on a hot beach, they'll pay up: inelastic.
Real life: fuel, cigarettes and electricity are famously inelastic in the short run, which is why governments tax them and why price spikes hurt. Specific brands are far more elastic than whole categories: people keep buying coffee when prices rise, but switch brands easily.
🔨 Do it: 5 tasks
0 / 5 doneTask 1 of 5 · Elasticity at $12
At $12 a cinema sells 1,200 tickets, and each $1 changes tickets by 100. Elasticity = (100 × price) ÷ tickets. What is it at $12?
Task 2 of 5 · Elasticity at $16
At $16 the line gives 800 tickets. What is the elasticity there?
Task 3 of 5 · Revenue at $14
Tickets = 2,400 − 100 × price. What is weekly ticket revenue at $14?
Task 4 of 5 · Students on Tuesday
A test cut the student Tuesday ticket from $8 to $6 (−25%). Student tickets rose from 200 to 300 (+50%). What's the elasticity?
Task 5 of 5 · A rival's price cut
Starplex, the multiplex in the next town, cut its prices by 10%. Northlight's tickets there fell by 3%. What's the cross-price elasticity?
🧩 Case: "Raise everything 10%. Revenue goes up 10%"
⭐ VIPThe finance director, Mateo, has a plan for the budget: "Put every ticket up 10%. Same customers, 10% more revenue." Rosa has elasticities by segment: Friday and Saturday evenings 0.6, weekday matinees 1.0, student Tuesdays 2.0.
What happens to revenue in each segment with a 10% price rise (roughly)?
What would you do? VIP members make the call, see what happens next across 2 decisions, and get the expert debrief.
🔁 Remember it
Demand is elastic (elasticity above 1). A price rise will...
Along a straight-line demand curve, elasticity is...
Which product usually has the LOWEST price elasticity?
Elasticity = % change in quantity ÷ % change in price. Above 1 (elastic), customers are price-sensitive: a price rise loses revenue. Below 1 (inelastic), a rise gains revenue. Exactly 1, revenue stays flat: that's the revenue-maximising price. Elasticity changes along the curve (higher up, more elastic) and differs by customer: students on a Tuesday are far more sensitive than families on a Friday night.
📅 Use it Monday
For something you sell or buy, guess the elasticity: list its substitutes, how big a share of the budget it is, and how urgent the need is. Many close substitutes and a big share of budget mean elastic; no substitutes and urgent need mean inelastic. Which customer group is the most price-sensitive?
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