Price Elasticity, Total Revenue and Demand Curves

Elasticity Calculation  Q avg. Q  P avg. P Q2-Q1 Q2+Q1 P2-P1 P2+P1

Elasticity and Slope Elasticity  Q  Q avg. P avg. Q = _____ * _____  P  P avg. Q avg. P Slope  P  Q

Drawing Demand Curves On one diagram, at the same price level, a flatter demand curve is more elastic

Total Revenue and Demand

Total Revenue and Demand along a straight line At a high price a given change in price is a small percentage change, but a given change in quantity is a big percentage change At high prices demand is elastic and TR increases as price falls PriceQuantityTR

Total Revenue and Demand along a straight line At a low price a given change in price is a large percentage change, but a given change in quantity is a small percentage change At low prices demand is inelastic and TR decreases as price falls PriceQuantityTR

Types of Elasticity Elastic: when coefficient > 1 Unit Elasticity: when coefficient = 1 Inelastic: when coefficient < 1 Zero Elasticity: when coefficient = 0 Infinite Elasticity: when coefficient = ∞

Elastic Demand and Total Revenue Elastic Demand: Elasticity > 1 Percentage change in quantity is greater than percentage change in price Raise Price: quantity demanded falls more –Higher price, lower total revenue Lower Price: quantity demanded rises more –Lower price, higher total revenue

Example of Elastic Demand and Total Revenue Price of Tim Horton’s coffee Rises 10% from $.95 to $1.05 Quantity Falls 20% from 110 to 90 cups per hour Elasticity = 20%/10% = 2 Total Revenue before the price rise: $.95 * 110 = $ Total Revenue after the price rise: $1.05 * 90 = $94.50

Inelastic Demand and Total Revenue Inelastic Demand: Elasticity < 1 Percentage change in quantity is less than percentage change in price Raise Price: quantity demanded falls less –Higher price, higher total revenue Lower Price: quantity demanded rises less –Lower price, lower total revenue

Example of Inelastic Demand and Total Revenue Price of gasoline Rises 10% from 66.5 cents to 73.5 cents Quantity Falls 5% from 205 to 195 liters per hour Elasticity = 5%/10% =.5 Total Revenue before the price rise: $.665 * 205 = $ Total Revenue after the price rise: $.735 * 195 = $143.33

Unit Elasticity Percentage change in quantity equals percentage change in price Total revenue does not change.

Unit Elasticity

Example of Unit Elasticity and Total Revenue Price of gasoline Rises 10% from 66.5 cents to 73.5 cents Quantity Falls 10% from 210 to 190 liters per hour Elasticity = 10%/10% = 1 Total Revenue before the price rise: $.665 * 210 = $ Total Revenue after the price rise: $.735 * 190 = $

Zero Elasticity Zero Elasticity: Elasticity = 0 Percentage change in quantity zero regardless of percentage change in price An extreme case of inelastic demand. –A Rise in price results in a proportionate rise in total revenue –A fall in price results in a proportionate fall in total revenue

Zero Elasticity

Infinite Elasticity Percentage change in quantity is unlimited however small the percentage change in price An extreme case of elastic demand. –A rise in price results in fall total revenue to zero because quantity demanded falls to zero –A fall in price results in an unlimited rise in total revenue, because quantity demanded rises without limit (but you must be able to procure an unlimited quantity to sell an unlimited quantity)

Infinite Elasticity