Chapter 19 Elasticity of Demand Affects Total Revenue

                                          Updated 10/2/15  

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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 

  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.   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. 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

) 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.

 See Calculating Price Elasticity using calculus and examples

Interpreting Elasticity of Demand   

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 EDSamuel L. Baker, Ph.D. US Carolina

B. 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 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.
Welker Video Elasticity &Total Revenue

Elasticity of Demand and Total Revenue


When Price Increases

Total Revenue

ED   >1


Somewhat Elastic Quantity Changing a Lot 
so a lot of revenue could be lost. 


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.


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

V. Determinates of Demand Elasticity         6 minute Video   
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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