Revenue at a major smartphone manufacturer was $1.9 billion for the nine months ending March 2, up 89 percent over revenues for the same period last year. Management attributes the increase in revenues to a 118 percent increase in shipments, despite a 28 percent drop in the average blended selling price of its line of phones. Given this information, is it surprising that the company’s revenue increased when it decreased the average selling price of its phones?

Given the information in the scenario, it is not surprising that the company’s revenue increased when it decreased the average selling price of its phones.

Firstly, it is a general conclusion of the law of demand that more quantity will be demanded at a lower price. Hence the reduction in price has increased the quantity demanded of phones and hence the revenue.

Secondly, it is a function of income elasticity of demand. Generally, phones would seem to be a luxury good whose demand will increased with increase in income. However with the drop in price consumers were able to buy more at a given level of income because it technically implied that their purchasing power has increased.