2. 20 - 1 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Elasticity of Demand

3. 20 - 2 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand HOW MUCH MORE OR LESS? DOES IT MATTER? to whom? THE LAW OF DEMAND SAYS... PRICE ELASTICITY OF DEMAND Consumers will buy more when prices go down and less when prices go up Price Elasticity Provides an Answer

4. 20 - 3 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand The percentage change in price The percentage change in quantity.01.02 Elasticity is.5 Q P P1P1 P2P2 Q1Q1 Q2Q2 D Measures Responsiveness to Price Changes PRICE ELASTICITY OF DEMAND

5. 20 - 4 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand The percentage change in price The percentage change in quantity Q P P1P1 P2P2 Q1Q1 Q2Q2 D Commonly Expressed as… PRICE ELASTICITY OF DEMAND  %P %  Q d Elasticity is.5

6. 20 - 5 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Inelastic from 0 to 1 Typical of necessities one must have Typical of luxuries one wants Elastic from 1 to  Unit elastic when exactly = 1 Price change does not reduce total revenue Price Elasticity is... PRICE ELASTICITY & TOTAL REVENUE

7. 20 - 6 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Extreme Cases PRICE ELASTICITY OF DEMAND Perfectly Inelastic Demand Perfectly Elastic Demand P 0 P 0 D1D1 E d = 0 D2D2 E d =  Q Q

8. 20 - 7 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand WHY ARE SOME THINGS MORE ELASTIC THAN OTHERS? Substitutability Proportion of Income oLuxuries versus Necessities Time

9. 20 - 8 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Q P D When prices are low, TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE So is total revenue

10. 20 - 9 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Q P D Total revenue rises with price to a point... TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

11. 20 - 10 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Q P D Total revenue rises with price to a point... then declines TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

12. 20 - 11 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Q P D Total revenue rises with price to a point... then declines TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

13. 20 - 12 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Q P D Total revenue rises with price to a point... then declines TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE Total Revenue Test