Elasticity

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 gt 1
6
5
4
3
Inelastic Range Elasticity lt 1
2
1
14
0
6
8
12
2
4
10
Quantity
4
Total Revenue

• 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 500 per
day Total Revenue 2 X 500 1,000
Profit TR all expenses
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Total Revenue
Price
When the price is 4, consumers demand 100 units,
and spend 400 on this good.
Quantity
0
6
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
7
Elastic Range Elasticity gt 1
6
5
4
3
Inelastic Range Elasticity lt 1
2
1
14
0
6
8
12
2
4
10
Quantity
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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

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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 gt 0
• Example Price soda ? gt Qty D other drinks ?
• Complements have negative cross-price elasticity
  Ea,b lt 0
• Example Price gas ? gt Qty D large SUVs ?

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 lt 0 (negative
  income elasticity)
• Income elastic EI gt1 (considered
  a luxury)
• Income inelastic 1 gt EI gt 0 (considered a
  necessity)

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Elasticity of Supply
Es gt 1
Es lt 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

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Practice Test 2