Chapter 19   Elasticity of Demand Affects Total Revenue

I. Introduction
II. Price Elasticity of Demand
III. Interpreting Elasticity of Demand
IV. Graphing and Interpreting
V. Determinates of Demand Elasticity
VI. Income elasticity of demand

VII. Cross elasticity of demand
VIII. Price elasticity of supply

 X. Effect on tax incidence
IX. Additional reading/listening    

XI. College Elasticity of Demand
XII. Practice Quizzes
& Answers

XIII. Current Political Economy Controversies
Other Micro Chapters
20) Consumer Behavior and Demand Theory
21) How Cost of Production Affects Supply

22) Analyzing Profit

Return to
  Economics Notes

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.
Elasticity of demand measures the responsiveness of quantity demanded to changes in price, income,

       and the 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. 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.
Elasticity from Samuel L. Baker, Ph.D. of the University of South Carolina provides problems to help with the
           understanding of elasticity.
. 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.   

 Sites of Interest

Library of Economics and Liberty
Ayn Randlexicon

Mises Institute

Roubini Global Economics

Brad DeLong’s Semi-Daily Journal

Top 100 Economics Blogs


NPR’s Planet Money
Video and Audio Lectures
  London Schoool Econ.


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

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Relative Change in Quantity


E Parameters

None, will pay anything, numerator is  zero.

Perfectly Inelastic

E = 0



0 < ED < 1

Q demanded and P change same percentage

Unitary Elasticity

ED = 1



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
Approx. PED of Various Products (U.S.)
    C. Elasticity quiz 1    Elasticity quiz 2  
Steponic's Economics and More  

Our Free Internet Libraries  improve grades and careers.

IV. Graphing and Interpreting

     A. At the Extremes 

B. Total Revenue along a Linear Demand Curve  

    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. 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.
Welker Video on Elasticity and Total Revenue

 Summary Elasticity of Demand and Total Revenue


When Price Increases

Total Revenue

ED   >1

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

ED = 1

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

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.
     Important questions to be answered concern
     how competitors react to these higher prices,

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V. Determinates of Demand Elasticity

D. 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
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 
            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?

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

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
Time until purchase No hurry Required quickly
Examples Steak, Vacations Salt, Bread


 VI. 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. In times of recession, income elasticity determines loss in revenue by producing firms.

Selected income elasticity's from Wiki

You Tube - Income Elasticity of Demand

         F. Visit  Income Elasticity of Demand from tutor2u for more information.


Screen Shot 2013-08-13 at 3.29.22 PM

 VII. 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. Visit Cross Price Elasticity of Demand from tutor2u for more information..
Income and Cross Elasticity Video from ACDC Econ is a review plus Cross Elasticity
 Virtual Economy from Buz\ed has an elasticity calculator.                                                                                    Please Blog People About this Free Site Using  

VIII. 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.
Selected supply elasticity's
      F. Visit Price elasticity of supply from tutor2u for more information

IX. Additional reading/listening
 A. Effect on tax incidence

History of Price Elasticity- Wiki
  C. Why Current Methods to Combat Climate Change Don’t Work Oil Price supply elasticity.
Economic Surplus of consumers and producers is explored in the next chapter.


X. Effect on tax incidence from Wiki

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. 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.

ACDC Videos  Tax Incidence     Taxes on Producers     Excise Tax Practice

For more see the main article: tax incidence

XI. College Elasticity of Demand
        A. Dramatic Increase In Quantity of People
             Buying a Degree

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. What did colleges do to increase elasticity of demand.
            1. Use the college graduate income figure for all students with a bachelors degree knowing that people
                with just a bachelor's degree earn much less than those that also have advanced degrees. BS only is the number!
            2. In the bachelors degree only group they use average earnings rather than median earnings because the average
                is skewed higher by high earning majors.  See
Economics of a College Education
            3. To maximize revenue needed to attract students, private colleges increase tuition much more than need and use the
                extra tuition paid by people they don't want to provide grants to people you 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 graduates.
                FUNNY MONEY GRANTS are different than grants provided by cash donors to the college.
             4. Colleges hire consultants with complex computer programs to maximize the cash received from students receiving
                 FUNNY MONEY GRANTS. Sports is an example as a students given a sports grant to play college ball will get
                 their entire family to come up with cash!
             5. Use grade inflation to convince students and parents their money is being well spent!

                                         For More Information Visit Economics of a College Education


e-mail the author at

Grade Inflation as A's and B's Increased from 40% to about 85%

NYT 7/14/11
People who work for colleges are increasing their own economic well-being by using high grades to make demand inelastic and milk the public. Were college catalogs changed to say average is B+ to A-?

XII. 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

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

Moe Practice Problems with Answers from Middle Tennessee State

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and careers.

Continuing 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 these facts concerning 


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 and 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?

Educating the Class of 2030
An Economic Prospective/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, Our Chief Competitor, Educates Toward Student Employability and Self-Esteem

3. Economist Lower Wage Predictions Came True

4. Individualized Curriculums for a Complex World


Data source is an extensive study.

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