Elasticities. Objectives Students will be able to Calculate the elasticity of demand. Calculate the value at which total revenue is maximized. Determine.

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Presentation transcript:

Elasticities

Objectives Students will be able to Calculate the elasticity of demand. Calculate the value at which total revenue is maximized. Determine if demand is elastic, inelastic or neither for specified values of price.

Vocabulary Elasticity of Demand

Vocabulary Inelastic (E < 1) the relative change in demand is less than the relative change in price Elastic (E > 1) the relative change in demand is greater than the relative change in price Unit Elasticity (E = 1) the relative change in demand and the relative change in price are approximately equal

How does the elasticity of demand relate to revenue? 1.If the demand is inelastic, total revenue increases as price increases. 2.If the demand is elastic, total revenue decreases as price increases. 3.Total revenue is maximized at the price where demand has unit elasticity.

Example 1 For the demand function Find E. For which value(s) of q, if any, is the total revenue maximized?

Example 2 Find the elasticity of demand (E) for the demand function at the value of p = $40. Is the demand elastic, inelastic, or neither at p = $40?