Chapter 19 Elasticity of Demand 
Affects Total Revenue

         Updated 12/14/15          Please 

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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. Applications

XI. Political Economy Book Summaries
XII. 2016 Presidential Issues 
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 price of related goods.  

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

 Please

 

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 and examples


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 Interpretation
     
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. Applications
     
     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. Examples
  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
               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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