Chapter 19   Elasticity of Demand Affects Total Revenue


I. Introduction

II. Price Elasticity of Demand 1 video
III. Interpreting Elasticity of Demand
IV. Graphing and Interpreting 3 videos

V. Determinates of Demand Elasticity 2 videos 
VI. Application   

Go to These Advanced Topics VII. Income Elasticity of Demand 1 video VIII. Cross Elasticity of Demand 1 video IX. Price Elasticity of Supply  X. Effect of Tax Incidence 3 videos XI. Additional Reading and Audios XII. College Elasticity of Demand XIII. Quizzes with Answers 


I.
Introduction
  
  A. Math Review and Quiz plus  Calculus Review for economics
       from Dr. R. L. Reynolds
of Boise St. University.
  
B. Some may want to review supply and demand principles 
      
explained in Chapter 4.
   C
. Elasticity of demand measures the responsiveness of quantity      
        demanded to changes in price, income, and the price of 
        related goods.   Please
  

II. Price elasticity of demand
     A. Price elasticity of demand measures the effect of price 
        changes on  quantity demanded. 

    B. Sometimes a price increase causes quantity bought to
        decrease significantly, other times not so much.
        1.High airfares for a luxury vacation may cause you
           to vacation locally.
        2.High coffee prices for people who think of coffee as a
           necessity may not change quantity demanded very much.
    C. The more quantity changes because of a price change,
         the more elastic is demand.
         1. Relative change will be measured as a one dollar change
             at higher prices is not as significant as at lower prices.
         2. Percent change is an easy way to measure relative change.
    D. Elasticity of demand is important because it predicts what may
         happen to total revenue received when a company changes 
         the price of a product.
    E. Elasticity from Samuel L. Baker, Ph.D. of  U. of South Carolina
         provides problems to help with the understanding of elasticity.
    F. Elasticity can be measured quantitatively.
        1. The
Coefficient of elasticity of demand for product x
           
measures its price elasticity. 
        2. Delta, , means change.
    G. A demand schedule has more than one elasticity of demand.
    H. Using one point is called point elasticity while two points is 
         called arc elasticity.
    I.  Calculating arc  linear price elasticity using a formula. 

Other Micro Chapters

20
) Consumer Behavior and Demand Theory

21) How Cost of Production Affects Supply

22) Analyzing Profit

 

 

 

 

 

 

 

Demand Schedule

Price 2 3 4 5 6 7 8 9
Quantity 9 8 7 6 5 4 3 2
Total Revenue 18 24 28 30 30 28 24 1

P goes from 4 to 5 and Q from 7 to 6

P goes from 5 to 6 and Q from 6 to 5

P goes from 6 to 7 and Q 
from 5 to 4

Note: A down sloping demand curve is yields a negative ED. Its sign is often ignored.

 See Calculating Price Elasticity using calculus.


III.
Interpreting Elasticity of Demand   

Relative Change in Quantity

Terminology

E Parameters

None, will pay anything, numerator is  zero.

Perfectly Inelastic

E = 0

Small

Inelastic

0 < ED < 1

Q demanded and P change same percentage

Unitary Elasticity

ED = 1

Large

Elastic

1 < E <

Infinitely Large, price doesn't change, denominator is zero

Perfectly Elastic

E is undefined, can't divide by zero.

     
    
A. Elasticity II provides practice measuring EDSamuel L. Baker, Ph.D. US Carolina

   
B. Approx. PED of Various Products (U.S.)

    C. Elasticity quiz 1    Elasticity quiz 2  

    D.
Steponic's Economics and More  

Our Free Internet Libraries  improve grades and careers.

 

IV. Graphing and Interpreting
      
A. At the Extremes

          
    B. Total Revenue derived from a Linear Demand Curve

1. Graph Analysis
    a. Moving from left to right on the bottom graph indicates
        what happens to revenue as price is lowered and the
        quantity sold increases.

    b. At lower quantities (higher prices) demand is elastic
        Quantity increases are relatively greater than price
        decreases and total revenue increases as more units
        are sold. 

    c. This means a company facing elastic demand can
         increase revenue by decreasing price. An important
         question to be answered concerns what  happens
         to costs when a lower price causes more units to be
         sold. 

      d. When demand becomes inelastic, quantity increases
         are now relatively less than price decreases, and total
                                                              revenue falls. 
             e. This means a company could increase total revenue by increasing price
                 and selling fewer units. This could mean a very high profit. 

             f.  Elastic and Inelastic Range of Demand Curve Video

      2. The Total Revenue Test     
            a. When demand is elastic, price and  total revenue move in the opposite direction.
            b. When demand is inelastic, price and total revenue move in the same direction.
                      c. Total Revenue Test Video has a  graphic explanation.
            d.
Welker Video Elasticity &Total Revenue

 

Elasticity of Demand and Total Revenue

Elasticity

When Price Increases

Total Revenue

ED   >1

 

Somewhat Elastic Quantity Changing a Lot 
so a lot of revenue could be lost. 

Decreases

ED = 1

 

Unitary Elasticity Quantity/Price Changing Same %

No Change

ED <1

 

Somewhat Inelastic Quantity Changed Little
so a lot of revenue could be gained.

Increased

We need to understand cost  production to understand making a profit.

V. Determinates of Demand Elasticity         6 minute Video   
Product 
Characteristics
Elastic 
Demand
Inelastic 
Demand
Number of substitutes Many Few or none
% of purchaser's budget High Low
Type of good Luxury Necessity, Emergency
Desire No hurry Required quickly
Examples Steak, Vacations Salt, Bread

 
VI. Application
     
     A. Various research methods are used to calculate price elasticity:
               1. Test markets
               2. Analysis of historical sales data
          B. Selected income elasticity's
             
              1.
Automobiles 2.46   Books 1.44    Restaurant Meals 1.40  
         
                  Tobacco 0.64         Margarine 0.20        Salt  0.10

             2. View a table containing elasticity of demand approximations presented 
                 by the MACKINAC CENTER FOR PUBLIC POLICY.
             3. Income elasticity's are notably stable over time and across countries.
        C. Price Elasticity and Government Actions
            1. High farm yields for crops with an inelastic demand cause farmers
     
            to lose money as people don't eat a lot more so we have a federal
                farm program.
            2. Excises taxes increase price so the governments puts them on
                inelastic goods like tobacco, alcohol, and jewelry.
                a. Drugs could be next and profit will be determined by price
                    elasticity of demand for drugs (How Inelastic is it?), law 
                    enforcement savings, and the cost of helping new addicts?
                    b.
Econ Concepts in 60 Seconds Analyzing Excise Tax Practice
                    c.
Why It's Obvious We are losing the war against drugs
                    d. 
Elasticity and the Price of Gasoline

       
           e. Elasticity of Demand for Higher Education
                   
f. Price Elasticity of Demand at a Private University

 

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