1. Total Revenue Test
Uses elasticity to show how changes in price will affect total revenue (TR).
(TR = Price x Quantity)
Elastic Demand-
Price increase causes TR to decrease
Price decrease causes TR to increase
Inelastic Demand-
Price increase causes TR to increase
Price decrease causes TR to decrease
Unit Elastic-
Price changes and TR remains unchanged
Ex: If demand for milk is INelastic, what will happen to expenditures on milk if price increases?

2. Is the range between A and B, elastic, inelastic, or unit elastic?
10 x 100 =$1000 Total Revenue
5 x 225 =$1125 Total Revenue A
Price decreased and TR increased, so…
Demand is ELASTIC
50% B
125%

3. You Should Now Get This Elastic and Inelastic Demand Baby
Winner 2013 Econ video contest

4. Total Revenue Test

5. Total Revenue Test
}inelastic
} unit elastic
}elastic

6. Password
Demand
Substitute
Inferior Good
Elastic
Total Revenue Test

7. Terms
Subsidy
Supply
Excise Tax
Inelastic
Elasticity Coefficient

8. Elasticity Practice 8

9. Graph the following chart
Calculate the Ed using the top set of numbers and prices rising

10. Answers -Graph
This is what your graph should look like

11. Answers - Ed Ed = % change in quantity demanded of product X
% change in price of product X
% Change in quantity = nqd – iqd
initial quantity demanded
% Change in price = New Price – Initial Price
Initial price
Ed = (90 – 100) ÷ 100
($2 - $1.00) ÷ $1.00
Ed = = -.1 1
Drop the negative: Ed is < 1 therefore the demand for is INelastic

12. Calculate the TR and determine if Total Revenue increased or decreased with a price increase
What is gain or loss on
price move?

13. Answers
$3 * 70 = $210
$2 * 90 = $180
Total Revenue increased $30

14. What Happens If --- Graph the following chart
Calculate the Ed using the bottom two numbers and prices rising

15. Answers - Ed Ed = % change in quantity demanded of product X
% change in price of product X
% Change in quantity = nqd – iqd
initial quantity demanded
% Change in price = New Price – Initial Price
Initial price
Ed = (40 – 70) ÷ 70
($4 - $3.00) ÷ $3.00
Ed = or % = 1.28
or 33.33%
Drop the negative: Ed is > 1 therefore the demand for is elastic

16. Ed & TR Test “quiz”

17. Practice Problem
See handout

18. Consumer and Producer Surplus
Consumer Surplus
Difference between maximum price willing to pay and the actual price producers charge
Think of it as a “willing to pay” curve

19. Marginal Benefit & Surplusses
What you gain when you get one more unit
Measured by what you are willing to give up
Everyday life we say “getting value for our money”
There is a difference between value and price

20. Value vs. Price Value is what we get Price is what we pay
Everyday idea of value is marginal benefit OR
The measure of the maximum price what consumers are willing to pay for another unit of a good or service

21. Pizza Sales Per Slice 2 1.5 $1 .5 P D 10 20 30 40 Consumer Surplus
Consumer surplus from 10th slice of pizza P
Willing to pay
Market Price
Amount Paid D 10

22. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

23. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

24. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

25. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

26. Example of Voluntary Exchange
Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000.
Analysis:
Buyer’ Maximum-
Sellers Minimum-
Price-
Consumer’s Surplus-
Producer’s Surplus-
$20,000
$15,000
$18,000
$2,000
$3,000

27. Voluntary Exchange Terms
Consumer Surplus is the difference between what you are willing to pay and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for.
PS = Price – Seller’s Minimum

28. Pearl Exchange Activity28

29. Voluntary Exchange Activity29

30. Consumer and Producer’s Surplus
Calculate the :
Consumer Surplus
Producer Surplus
Total Surplus
$10 8 6 $5 4 2 1 S CS PS D 10 Q

31. Calculating Consumer Surplus In Dollars
Max Willing to pay
Actual price (E)
Calculate CS $9 $5
9 – 5 = $4 $8
8 – 5 = $3 $7
7 – 5 = $2 $6
6 – 5 = $1
5 – 5 = $0
Sum = CS
= $10

32. Calculating Producer Surplus In Dollars
Min Price charged
Actual price (E)
Calculate PS $2 $5
5 – 2 = $3
5 - 3 = $4
5 - 4 = $1
5 – 5 = $0
Sum = PS
= $6

33. Surpluses
Could be calculated in Quantity

34. Summary
Consumption Inefficiency
Production
Inefficiency

35. Practice Problem Name of Consumer Price willing to pay Matt $20 Don
$15
Sarah $8
George
$12
Ann $7
Q. If dinner sells for $10, what is the value of Dons’ consumer surplus?

36. Practice Problem Name of Consumer Price willing to pay Matt $20 Don
$15
Sarah $8
George
$12
Ann $7
Q. If dinner sells for $10, what is the value of Dons’ consumer surplus?
A. Willing to pay is $15. Market price is $10. Willing to pay ($15) – Actual Price ($10) = $5

37. Practice Problem Name of Consumer Price willing to pay Matt $20 Don
$15
Sarah $8
George
$12
Ann $7
Q. If dinner sells for $11, what is the TOTAL value of consumer surplus?

38. Practice Problem Name of Consumer Price willing to pay Matt $20 Don
$15
Sarah $8
George
$12
Ann $7
Q. If dinner sells for $11, what is the TOTAL value of consumer surplus?
20 – 11 = 9, 15 – 11 = 4, 12 – 11 = 1
= $14 consumer surplus

39. For a given linier demand curve, the value of consumer surplus does what as market price increases?

40. For a given linier demand curve, the value of consumer surplus does what as market price increases?
Decreases as market price increases

41. (1)
Price
(2) QA
(3)
(4) QB
(5)
(6) QC
(7)
$10
100
$_____ 9
111
_____
130
110 8
125
170
120 7
143
220 6
167
280
140 5
200
350
150
15. A marketing firm has done a study of market demand for DVDs of three different movies. Calculate the total revenue for each movie in columns 3, 5, and 7.
Without calculating the price elasticity of demand, indicate whether demand for each movie is elastic, inelastic or unit-elastic. For which movie would a reduction in price produce the greatest increase in revenue?

42. (1) Price (2) QA (3) (4) QB (5) (6) QC (7) $10 100 $1000 9 111 999 130
(4) QB
(5)
(6) QC
(7)
$10
100
$1000 9
111
999
130
1170
110
990 8
125
1000
170
1360
120
960 7
143
1001
220
1540
910 6
167
1002
280
1680
140
840 5
200
350
1750
150
750
Without calculating the price elasticity of demand, indicate whether demand for each movie is elastic, inelastic or unit-elastic. For which movie would a reduction in price produce the greatest increase in revenue?
Applying the total revenue test, we see that total revenues remain approximately constant for movie A, meaning that demand is unit-elastic. Total revenues for movie B are increasing as price decreases, meaning that demand for movie B is elastic. Total revenues for movie C are decreasing as price decreases, meaning the demand for movie C is inelastic. [text: E pp ; MA pp ; MI pp ]