# Revenue Calculator

By Tibor Pal, PhD candidate
Last updated: Aug 31, 2020

The revenue calculator is a simple tool that helps you to compute the total revenue made by selling a certain quantity of a good or service at a certain price. Besides, if you read further, you can quickly learn how to calculate total revenue and get some insight into the economic concepts connected to revenue. You can, for example, learn how a total revenue test can help increase your revenue.

You may also find the following calculators useful, as give you more insight into this subject:

## How to calculate total revenue?

The revenue calculator applies the simple revenue formula, which is the following:

`total revenue = price * quantity`

Read on to learn how to calculate revenue with an example and how analyzing the basic components of total revenue in different demand scenarios can help you increase your total revenue.

## How to use the revenue calculator?

Now that you know how to calculate revenue, it's time to inspect our revenue calculator.

It's straightforward to use, and, more importantly, it works in different directions. Simply input values into any two of the three available fields and we will calculate the third one for you in the blink of an eye.

## What is the total revenue test? Example on how to calculate revenue

Knowing how to calculate total revenue isn't enough! If you've ever wondered how managers decide on which price strategy to use to maximize their revenue, you are in the right place. Businesses all around the world apply the total revenue test to support cash-flow management.

Let's demonstrate the concept behind this practical analysis with a simple example. Suppose you are an excellent programmer and you've just created a handy software. To make some money from it, you set up a small business to sell this software through. After a year of operation, you conduct a revenue analysis to see how to increase revenue in the future. To do that, you ask your smart economist friend, Jack, to help you with it. Jack happily prepares a detailed revenue analysis (the software's possible prices, the respective quantity that will be demanded, and your total revenues) for you, as you already know how to calculate revenue. Jack also calculates the related price elasticities. The below table summarizes these figures:

Price (P) Quantity (Q) Total Revenue (P*Q) Price Elasticity (E)
A \$0 40 \$0 0.00
B \$10 35 \$350 -0.14
C \$20 30 \$600 -0.33
D \$30 25 \$750 -0.60
E \$40 20 \$800 -1.00
F \$50 15 \$750 -1.67
G \$60 10 \$600 -3.00
H \$70 5 \$350 -7.00
I \$80 0 \$0 -∞

Now, let's say you've been selling your software for 30 dollars. How will you maximize your total revenue for the upcoming year? Should you increase the price to boost cash flow, or cut the price to find more costumers?

You may notice that the absolute value of price elasticity increases as the price increases. When the absolute value of price elasticity is lower than 1 (elastic), an increase in price leads to an increase in total revenue, and a value higher than 1 (inelastic) leads to a reduction. So you probably already know the answer: according to the analysis, if you raise the price to 40 dollars, you would reach the highest revenue, 800 dollars. Therefore, the price-quantity combination that maximizes total revenue is point E, where the price elasticity equals -1.

To summarize, the total revenue test tells us that, if demand is elastic, an increase (decrease) in price will lead to a decrease (increase) in total revenue. If demand is inelastic, an increase (decrease) in price will increase (decrease) in total revenue. Finally, total revenue is maximized at the point where demand is unitary elastic (equal to (minus) 1).

Tibor Pal, PhD candidate
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