VI. Elasticity of demand and total revenue

A. Moving from left to right on the bottom graph indicates what happens to total 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. 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. F. When demand is elastic, price and total revenue move in the opposite direction. G. When demand is inelastic, price and total revenue move in the same direction.   Please Blog Friends About This Free Library Using

VII. Income elasticity of demand 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. Visit  Income Elasticity of Demand from tutor2u for more information.

VIII. 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. Visit Cross Price Elasticity of Demand from tutor2u for more information.
 

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. Visit Price Elasticity of Supply from tutor2u for more information.