1. Total Expenditures
Econ 9/27

2. Warm Up
Draw a correctly-labeled, generic demand curve. Label this as D. Based on the scenario, draw a new demand curve on the same set of axes. Label this as D’ (or D1). Indicate which factor affecting demand is being illustrated for each example.
Product: chicken. The price of beef has decreased.
Product: coffee in the US. Immigration into the US continues to increase.
Product: TVs (considered a normal good). People are earning less money this year than last.
Product: Armani underwear. The marketing campaign featuring David Beckham is wildly successful.
Product: iPhone 8. News reports that the iPhone X is about to be released.

3. Total Expenditures (Total Revenue) Test
Purpose: to look at the impact of a price change
Helps to determine and estimate elasticity of demand
Total expenditures/revenue = price x quantity demanded at any point on the curve
***This is not the same thing a profit!

4. Results First calculate TR originally then compare it with TR now
Ex. TRoriginal= 1x3= $3
TRnew= .75x9= $6.75
TR increased as price decreased so the elasticity of demand is elastic
When TR and price move in opposite directions it is elastic

5. Results Ex. TRoriginal= 1.50x3= $4.50 TRnew= .50x5= $2.5
TR decreased as price decreased so the elasticity of demand is inelastic
When TR and price move in the same direction it is inelastic

6. Results Ex. TRoriginal= 6x4= $24 TRnew= 4x6= $24
TR stayed constant as price decreased so the elasticity of demand is unit elastic
When TR doesn’t change and price decreases it is unit elastic

7. Practice Problems
For each problem, use the total expenditure test to determine if the demand for the product is elastic, inelastic, or unit elastic.
As the price of a product increases from $5 to $8, the quantity demanded falls from 100 to 75.
As the price of a product decreases from $100 to $85, the quantity demanded increases from 500 to 650.
As the price of a product increases from $10 to $50, the quantity demanded falls from 100 to 20.

8. Practice Problems
As the price of a product increases from $5 to $8, the quantity demanded falls from 100 to 75.
TRoriginal = 5x100= 500 TRnew = 8x75= 600
TR increased as price increased so inelastic
2. As the price of a product decreases from $100 to $85, the quantity demanded increases from 500 to 650.
TRoriginal = 100x500= TRnew = 85x650= 55250
TR increased as price decreased so elastic
As the price of a product increases from $10 to $50, the quantity demanded falls from 100 to 20.
TRoriginal = 10x100= TRnew = 50x20= 1000
TR had no change as price increased so unit elastic

9. Elasticity and Profits
Why is analysis of demand elasticity important to business owners?
If you own a business and you want to raise profits, you might be tempted to just raise the prices.
This would work if demand is inelastic but if it is elastic it will backfire and you will have less TR!