Economic issues include:

• Inverse demand curves

• Elasticities

• Income and substitution effects

• Normal, inferior and Giffen goods

Econometric issues include:

• Model specification: using logs to estimate elasticities

• Running regressions using Excel

• Hypothesis testing: one-tailed t tests

Data issues include:

• Data constraints

• Proxy variables

The issue

If you were the manager of the London Underground or American Airlines would you raise ticket prices, or drop them? Which strategy would maximise your firm's profits? The ‘law of demand’ states that if prices are lowered then there will be rises in demand. But this doesn't necessarily mean that a firm should just lower prices if it wants to boost revenue. Other effects operate too and the net result will depend on how sensitive consumers are to changes in price. If for some reason consumers are determined to have only a certain amount of a particular good or service then lowering prices may make little difference to the amount demanded and so a firm's revenues might fall because they are selling similar quantities but at lower prices. For example, if you manage an airline and your consumers don't care much about price; if they are not motivated to travel more even when flights are cheaper, then total revenues would fall, perhaps so much that costs could not be covered (and you would probably be looking for a new career).