1. The Use of Price Elasticity of Demand Why Elasticity matters?

2. Elasticity, Total Revenue, and Demand The elasticity of demand tells suppliers how their total revenue will change if their price changes. Total revenue equals total quantity sold multiplied by price of good.

3. Elasticity, Total Revenue, and Demand If E D is elastic (E D > 1), a rise in price lowers total revenue. Price and total revenue move in opposite directions.

4. Elasticity, Total Revenue, and Demand If E D is unit elastic (E D = 1), a rise in price leaves total revenue unchanged.

5. Elasticity, Total Revenue, and Demand If E D is inelastic (E D < 1), a rise in price increases total revenue. Price and total revenue move in the same direction.

6. Elasticity and Total Revenue A Unit Elastic Demand E = 1 TR constant C 0 6 Price Quantity $10 8 6 4 2 12345789 B E Lost revenue F Gained revenue TR E = $4x6=$24 TR F = $6x4=$24

7. Elasticity and Total Revenue A Price Inelastic Demand E < 1 Quantity $10 8 6 4 2 0 1234567 8 9 TR rises if price increases C H G Lost revenue Gained revenue TR G = $1 x 9 = $9 TR H = $2 x 8 = $16 B

8. C B Elasticity and Total Revenue A Price Elastic Demand E > 1 Quantity $10 8 6 4 2 0 123456789 TR falls if price increases. K J Lost revenue Gained revenue TR J = $8 x 2 = $16 TR K = $9 x 1 = $9

9. Total Revenue Along a Demand Curve With elastic demand – a rise in price lowers total revenue. With inelastic demand – a rise in price increases total revenue.

10. Total Revenue Along a Demand Curve Elastic E D > 1 E D = 1 Inelastic E D < 1 Price Quantity 0 0 Total revenue Q0Q0 Q0Q0

11. Relationship Between Elasticity and Total Revenue Price Rise Price Decline Elastic (E D > 1) TR decreases TR increases Unit Elastic (E D = 1) TR constant Inelastic (E D < 1) TR increases TR decreases 7-11

12. Elasticity of Individual and Market Demand Price discrimination occurs when a firm separates the people with less elastic demand from those with more elastic demand.

13. Elasticity of Individual and Market Demand Firms that price discriminate charge more to the individuals with inelastic demand and less to individuals with elastic demands.

14. Elasticity of Individual and Market Demand Examples of price discrimination include: –Airlines’ Saturday stay-over specials. –The phenomenon of selling new cars. –The almost-continual-sale phenomenon.