Chapter 19   Elasticity of Demand Affects Total Revenue

Basic Topics

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 videos
VIII. Cross Elasticity of Demand
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
Class Discussions Questions

 

 

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. An easy way to measure relative change is to use percent 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 the University 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.  See Calculating Price Elasticity
        using calculus.

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.


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 ED.   
        From Samuel L. Baker, Ph.D.
of the University of South Carolina
   
B. Approx. PED of Various Products (U.S.)

    C. Elasticity quiz 1    Elasticity quiz 2  

    D.
Steponic's Economics and More  

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IV. Graphing and Interpreting

     A. At the Extremes
 
B. Total Revenue along a Linear Demand Curve  

    
F. The Total Revenue Test     
     1. When demand is elastic, price and
          total revenue move in the opposite
          direction.
     2. When demand is inelastic, price and
         total revenue move in the same direction.
    
3. Total Revenue Test Video has a 
         graphic explanation.
     4.
Welker Video Elasticity &Total Revenue

 Summary Elasticity of Demand and Total Revenue

   

When Price Increases

Total Revenue

ED   >1

Somewhat
Elastic
Quantity Changing a Lot so you could lose lots of money. decreases

ED = 1

Unitary
Elasticity
Quantity/Price Changing Same % no change

ED <1

Somewhat Inelastic Quantity Doesn't Change Much, so you could make lots of money increases
We need to understand cost  production to understand making a profit.

 

 

 

Elastic and Inelastic Range of Demand Curve Video

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 an 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. Important questions to be answered
     concern how competitors react to 
     these higher prices,
can the company
     produce lower quantities at reasonably
     low costs, exactly how much profit will
     the company make, and how will
     the government react to these higher
     profits. 
    Please

V. Determinates of Demand Elasticity            6 minute Video  

 Sites of Interest

Political Economy Controversies 
examine poverty, middle class stagnation, politics and capitalism.
Library of Economics and Liberty

Ayn Randlexicon

Mises Institute

Roubini Global Economics

Top 100 Economics Blogs

 

A. Product Characteristics B. Elastic Demand C. 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
      1. Various research methods are used to calculate price elasticity:
           a. Test markets
           b. Analysis of historical sales data
      2. Selected income elasticity's
            a.
Automobiles 2.46   Books 1.44    Restaurant Meals 1.40 (Higher in Great Recession) 
       
                Tobacco 0.64         Margarine 0.20        Salt  0.10

            b. View a table containing elasticity of demand approximations presented 
                by the MACKINAC CENTER FOR PUBLIC POLICY.
            c. Income elasticity's are notably stable over time and across countries.
      3. Price Elasticity and Government Actions
           a. 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.
           b. Excises taxes increase price so the governments puts them on inelastic goods
               like tobacco, alcohol, and jewelry.
               1) 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?

               2) Econ Concepts in 60 Seconds Video on Analyzing Excise Tax Practice

        
4. Why It's Obvious We are losing the war against drugs  03/31/11

        
5. Elasticity and the Price of Gasoline 04/06/11

        
6. Elasticity and the Price of Gasoline 04/06/11

        
6.
Price Elasticity of Demand at a Private University
 
         
7. Elasticity of Demand for Higher Education
Free Political Science Book Summaries

Presidential Courage Brave Leaders and How They Changed America 1789-1989 by Michael Beschloss

Second Chance Three Presidents and the Crisis of America Superpower,  by Zbigniew Brzezinski

American Dynasty Aristocracy, Fortune, and the Politics of Deceit in the House of Bush, by Kevin Phillips  
 


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