What is a 'Total Revenue Test'
A total revenue test is a test that approximates the price elasticity of demand by comparing the change in total revenue as a result of changing the product price. The total revenue test assumes all other factors that may influence revenue will remain constant during the testing period.
BREAKING DOWN 'Total Revenue Test'
The total revenue test can provide valuable information for a company. Determining whether a product is elastic or inelastic can help a firm maximize revenue. If the test concludes that a good is elastic, the company will be very cautious about price changes, as small changes will produce large decreases in demand. Alternatively, if the good is inelastic, the firm will know that increases in price will only yield small changes in the quantity demanded. Knowing whether a good is inelastic or elastic will allow a firm to avoid costly pricing mistakes.