Chapter 19 Elasticity of Demand Affects Total Revenue
A more concise One-Page Test Review of Chapter 19 may help with exams.  Updated 7/14/17
 
   

Index
I. Introduction  
II. Price Elasticity of Demand 1 video  
III. Interpreting Elasticity
 
IV. Graphic Interpreting of Elasticity 
V. The Total Revenue Test  3 videos 
VI. Determinates of Demand Elasticity
1 video
VII. Applications    
VIII. Income Elasticity of Demand 1 video
IX. Cross Elasticity of Demand 1 video 
X. Price Elasticity of Supply 

XI. Effect on Tax Incidence
3 videos
XII. Additional Reading and Listening
XIII Elasticity of Demand for College Graduates

XV Practice Quizzes & Answers
 
Practice Quizzes   Updated 3/6/17


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. 

 

Unit 1 Review The effect price changes have on quantities purchased useful

 

Micro Test Review 1 covers chapters 19-22

  Quick Notes Economic Review System for those pressed for time.

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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.)

   
Our Free Internet Libraries  improve grades and careers.

Unit 3 Review High elasticity has substantial effect, inelastic demand has little quantity movement.

 

IV. Graphic Interpreting of Elasticity
  
 A. At the Extremes

            

   B. Total Revenue derived from a Linear Demand Curve  Please 
        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.
 

Unit 4 Review Elastic is flat, inelastic is steep

V. 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

Unit 5 R With elastic demand p and TR move in opposite directions, Inelastic the same direction

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

VI. 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
 Unit 6 Review Substitutes, price, necessity or luxury, budgets position determine elasticity

VII. Applications
       
 
 
      A. Various research methods are used to calculate price elasticity:
           1. Test marketing
           2. Analysis of historical sales data
        B. Example 1
            1. Slave Redemption and Elasticity 1
            2. Slave Redemption and Elasticity 2
        C.
Selected income elasticity's
             

  Automobiles 2.46     
Filling the Tank on Friday May Be a Bad Idea
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.
      D. 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

VIII. Income elasticity
       is the % change in quantity demanded divided by the % change in income. 

        A. Income elasticity is positive for normal (superior) goods such as steak
             and vacations - more is purchased as income increases. 
        B. Income elasticity is negative for inferior goods such as bread and
             hamburger-
less is purchased as income increases.
          C. In times of recession, income elasticity determines loss in revenue by
             producing firms. 

        
D. Selected income elasticity's Wiki
        E. Income Elasticity of Demand
      
     1. Income Elasticity of Demand from tutor2u for more information.
            
2. Example


IX. Cross elasticity of demand 
    
is the % change in quantity demanded divided by the % change in the price of a substitute or complement. 
       A. Cross elasticity is positive for goods that are substitutes (price of hot dogs up, quantity of hamburger sold up).
       B. It is negative for goods that are complements (price of hot dogs up, quantity of hot dog rolls sold down).
       C Near zero for independent goods (peanuts and grapefruit)
       C. Cross Price Elasticity of Demand from tutor2u
       D. Income and Cross Elasticity Video from ACDC Econ
       E. Virtual Economy from Buz\ed has an elasticity calculator.       Please                                                                 

X. Price elasticity of supply  is the % change in quantity supplied divided by the % change in price. 

                                         
       A. It is a function of how factor costs change as more is produced and the passage of time. 
       B. If costs (factor prices such as wages and rent) change little as more is offered for sale at higher selling prices
            then profit potential is high and supply will be elastic. 
       C. Supply elasticity also increases with time as companies have more time to adjust to higher costs. 
           1. Unusually high demand for tomato's or the Chrysler PT Cruiser take time to produce and supply is inelastic.
           2. Gateway may be able to increase the number of a new popular model computer quickly and supply is more elastic.
       D. Gold production is costly and takes time so price is volatile because of frequent demand changes.
       E. Selected supply elasticity's
       F. Visit Price elasticity of supply from tutor2u for more information

 
XI. Tax Incidence Effects

PEDs, in combination with price elasticity of supply (PES), can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is perfectly inelastic, by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant. Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety. In the opposite case, when demand is perfectly elastic, by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero. As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.[38]

In practice, demand is likely to be only relatively elastic or relatively inelastic, that is, somewhere between the extreme cases of perfect elasticity or inelasticity.  ACDC Videos  Tax Incidence  
Taxes on Producers     Excise Tax Practice
re see the main articltax incidence

 

 

 

 

 

 

 

 

 

 

 

More generally, then, the higher the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more inelastic the demand compared to PES, the heavier the burden on consumers. The general principle is that the party (i.e., consumers or producers) that has fewer opportunities to avoid the tax.

XII. Additional reading/listening
      
A. Effect on tax incidence
       B. History of Price Elasticity- Wiki
       C. Why Current Methods to Combat Climate Change Don’t Work  
  
    D.
Economic Surplus of consumers and producers is explored in the next chapter.
XIII. Elasticity of Demand for College Graduates
      
A. Dramatic Increase In Quantity of People Buying
            a Degree Push Up Price

B. Price is up much more than
     even health care!
     1. Cost of living tripled
     2. Health care up six times
     3. College tuition/fees almost
         ten times

 

 

 

 

 

 

    C. How colleges increase demand elasticity 

        1. The include graduate degrees in with just a bachelors' degree
            when reporting income figure for bachelors'' all students with a
            knowing that people with just a bachelor's degree earn much less
            than those that also have advanced degrees.

 

 

 

 

 

 

 

Advanced Degrees Graduates  
Earn Much More

 

          2. In the bachelors degree only group those prejudice for
                  college use average earnings rather than median earnings
                  as averages are skewed higher by high by STEM majors.
                  See Economics of a College Education

 

 

 

 

 

 

 

 

 

 

Stem Graduates Make Much More

          3. Grade inflation is used to convince students and parents
                      their money is being well spent! Colleges teachers are
                      increasing their own economic well-being by using high
                      grades to make demand inelastic. Were college catalogs
                      changed to say average is B+ to A-? Grade Inflation as
                      A's and B's Increased from 40% to about 85% Making
                      Product Look Like a Better Investment.

 

         4. To maximize revenue needed to attract students private colleges
              increase tuition much more than needed and use the extra tuition
              paid by people they don't want to provide grants to people they
              do want. In affect, the poorer students are financing the better
              students who will end up getting one of the few good jobs
              available to college grads. FUNNY MONEY GRANTS are
              different than grants backed by cash provided to the college
              by alumni and friends.
              See
Why College Tuition is Not Going Up Rapidly

 

 

 

 

Bachelor's Only Earn Little
Can't Pay for Loans

         5. Colleges hire consultants with complex computer
                programs to maximize the cash received
                from students receiving FUNNY MONEY
                GRANTS. Students given a FUNNY MONEY
                sports grant to play college ball can get their
                entire family to come up with more cash often
                through
borrowing!

 

Please   

e-mail the author at antonw@ix.netcom.com

 

 

XIII. Practice Quizzes With Answers

Elasticity Quiz with  Answers from Dr. R. L. Reynolds of Boise St. University.

Click Level 1 Elasticity Questions
print out the multiple choice practice questions, answer them on the print out, 
and click
Answers for my answers.
Buy the Book Economics, the source, from amazon.com

amosweb practice test by specific topic.
 Choose Elasticity, answers from amosweb.

More Practice Problems with Answers from Middle Tennessee State

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XIV Class Discussion Question 

This chapter and chapters to follow will provide the knowledge needed 
to determine why college graduate salaries are dropping
and unemployment is staying high though below the national average. 
Discuss using this and other facts.

USA  Today "Study boosts rankings of U.S. Schools"  2/16/12

The US ranks 11th in international math testing.  At the top are Hong Kong, Singapore, and Chinese Taipei, three cities whose populations are far from representative of any large Asian population.  Japan, #4, is an economic and cultural basket case. The next four with a median score of 543 includes England at 541. USA Today's next grouping of five countries have a median score of 529 which is the U.S. score. Germany, our main competitor for values added exports scored 525. Australia led the next grouping at 316. Those U.S> education lobby is no different than the military lobby. Their goal is to create inelastic demand that lead to abnormal profits.  

The U.S. has never led the world in international testing.

For more information visit 

Current Events Internet Library #Education  
 
textbooksfree.org Free Interne Libraries #Education

At some point, this data may affect these studies.
Price Elasticity of Demand at a Private University 

Elasticity of Demand for Higher Education

Not All College Majors Are Created Equal

Determine interesting questions, relevant data, and alternative answers to your questions. What additional data would be useful to your analysis?

 

Data source is an extensive study.

Educating the Class of 2035 An Economic Prospective and Student Manifesto

1. Educating for a Students Special Intelligence Leads to Year Round School,  a Shorter School Day, 
Economic Efficiency, More Learning, Happier Students, Satisfied Teachers

2. How Germany Educated Toward Student-Employability and Self-Esteem 

3. The World Changed Causing Many Good Jobs to Disappear.     
 
4. Individualize Curriculums to enhance skills related to a student's special intelligence

5. Recent Educational Observations of Top Education, Business, Economic and Political Leaders. 

Chapter 1 Practice Quizzes    Please 

1) amosweb practice test by specific topic

2) Elasticity Quiz with  Answers from Dr. R. L. Reynolds of Boise St. University.

3) Click Level 1 Elasticity Questions, no answers provided

4) amosweb practice test by specific topic.  Choose Elasticity, answers from amosweb.

5) More Practice Problems with Answers from Middle Tennessee State with answers

 

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