Chapter 19 Elasticity of Demand 
Affects Total Revenue 
        

 

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. More Reading and Audios
XII. College Elasticity of Demand  


Updated 12/14/15          Please 

I. Introduction review math, supply, demand, equilibrium price
II. Price Elasticity of Demand
The effect price changes have on quantities purchased useful. 1 video
III. Interpreting Elasticity High elasticity has substantial effect, inelastic demand has little quantity movement.
IV. Graphic Interpreting of Elasticity 
elastic is flat, inelastic is steep

V. The Total Revenue Test
With elastic demand p and TR move in opposite directions, Inelastic the same direction 3 videos
VI. Determinates of Demand Elasticity substitutes, price, necessity or luxury, budgets position 1 video
VII. Applications
 
Chapter Practice Quizzes        Micro Test Review 1 covers chapters 19-22 with three pages


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. 

 

 

 

 

 

 

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.
 

IV. Graphic Interpreting of Elasticity
  
 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.
 

 

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

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

 

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

  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.
     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

Chapter 1 Practice Quizzes

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

 

Last Chapter  Chapter 19 Class Discussion Questions   

Chapter 19 Homework Questions   Next Chapter 

Table of Contents

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. More Reading and Audios
XII. College Elasticity of Demand