1. Elasticity & Total Revenue
Chapter 5 completion….

2. Linear Demand curves have both elastic
& inelastic ranges
Points with high price & low quantity demand is elastic
Points with low price & high quantity demand is inelastic

3. Linear Demand Curve Elasticity
Price $7
Elastic Range: Elasticity > 1 6 5
Unit Elastic at midpoint of line 4 3
Inelastic Range: Elasticity < 1 2 1 2 4 6 8 10 12 14
Quantity

4. Total Revenue Profit = TR – all expenses
Total revenue (TR) is not profit
It is the total amount of revenue (money) received by a business
TR = Price & Quantity Sold
Coffee Shop: Price coffee: $2/cup
Qty Sold: per day
Total Revenue = $2 X = $1,000
Profit = TR – all expenses

5. Total Revenue
Price
When the price is $4, consumers demand 100 units, and spend $400 on this good.
Demand $4
100 P
P × Q = $400
( total revenue)
Quantity Q

6. Price increases leads to: TR falling in elastic ranges
Total Revenue
Price ↑
TR ↑
Price increases leads to:
TR rising in inelastic range
TR falling in elastic ranges
TR reaches maximum value at unit elastic

7. Linear Demand Curve Elasticity
Price
Price from $4 to $5 => TR from $24 to $20. $7
Elastic Range: Elasticity > 1 6 5
Price from $2 to $3 => TR from $20 to $24 4 3
Inelastic Range: Elasticity < 1 2 1 2 4 6 8 10 12 14
Quantity

8. Summary Elastic demand curves are flat
Inelastic demand curves are steep
Slope is constant, Elasticity is not
Linear demand curves have both inelastic & elastic ranges
Total Revenue:
Falls when Prices ↑ on elastic goods
Rises when Prices ↑ on inelastic goods
Firms maximize total revenue by producing at unit elasticity

9. Total Revenue & Elasticity Worksheet

10. Cross-price elasticity of demand
Change in quantity demanded of one good in response to a change in price of another good
Substitutes have positive cross-price elasticity Ea,b > 0
Example: Price soda ↑ => Qty D other drinks ↑
Complements have negative cross-price elasticity Ea,b < 0
Example: Price gas ↑ => Qty D large SUV’s ↓
% ∆ in Pgood-2
% ∆ in Qty Dgood-1
Cross-price elasticity of demand =

11. Income Elasticity of Demand
Income elasticity of demand- how much quantity demanded responds to a change in consumers’ income
EI = % ∆ in Qty Demanded
% ∆ in Income
Normal Goods have positive Income elasticity (normal good = Income ↑, Qty D ↑)
Inferior Goods: EI < (negative income elasticity)
Income elastic: EI > (considered a luxury)
Income inelastic: 1 > EI > 0 (considered a necessity)

12. Elasticity of Supply Depends on 2 primary factors:
Es > 1
Es < 1
Depends on 2 primary factors:
 Ability to change quantity produced
Beach front property is inelastic
Books, cars are elastic
Time Period
Supply is more elastic in long run vs. short run
Time allows companies to produce more

13. Practice Test #2