If you raise price and demand is elastic, then total revenue will decline. However, since you are selling less (under the law of demand), your expenses will decline. In this situation, as in the one above, we need specific revenue and production cost information to make a determination on whether profits will increase or decrease. We will have this information as we proceed further into the course. The short answer is that when demand is elastic and we either raise or lower price, we can't be certain whether profits will rise or fall.

We can make definitive statements, however, when demand is known to be inelastic. Raising the price will result in more profit because total revenue will increase while total costs decrease. Costs drop because less is sold at a higher price, according to the law of demand.

If demand is inelastic and price is reduced, then profit falls. Total revenue decreases due to the inelasticity. Costs go up because at the lower price a greater quantity is sold.

Addendum: What should a firm do if demand is unit elastic? Answer: If the firm wants to maximize profit, it should raise the price. True, total revenue stays the same due to the unitary elasticity, but total cost goes down since less will be sold at a higher price.