Price Elasticity, Total Revenue and Demand Curves

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Price Elasticity, Total Revenue and Demand Curves
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Elasticity Calculation

• ?Q
• avg. Q
• ?P
• avg. P

• Q2-Q1
• Q2Q1
• P2-P1
• P2P1

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Elasticity and Slope

• Elasticity
• ?Q ?Q avg. P
• avg. Q _____ _____
• ?P ?P avg. Q
• avg. P
• Slope
• ?P
• ?Q

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Drawing Demand Curves

• On one diagram, at the same price level, a
  flatter demand curve is more elastic

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Total Revenue and Demand
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Total Revenue and Demandalong a straight line

• At a high price a given change in price is a
  small percentage change, but a given change in
  quantity is a big percentage change
• At high prices demand is elastic and TR increases
  as price falls

Price Quantity TR
10 0 0
9 1 9
8 2 16
7 3 21
6 4 24
5 5 25
4 6 24
3 7 21
2 8 16
1 9 9
0 10 0
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Total Revenue and Demandalong a straight line

• At a low price a given change in price is a large
  percentage change, but a given change in quantity
  is a small percentage change
• At low prices demand is inelastic and TR
  decreases as price falls

Price Quantity TR
10 0 0
9 1 9
8 2 16
7 3 21
6 4 24
5 5 25
4 6 24
3 7 21
2 8 16
1 9 9
0 10 0
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Types of Elasticity

• Elastic when coefficient gt 1
• Unit Elasticity when coefficient 1
• Inelastic when coefficient lt 1
• Zero Elasticity when coefficient 0
• Infinite Elasticity when coefficient 8

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Elastic Demand and Total Revenue

• Elastic Demand Elasticity gt 1
• Percentage change in quantity is greater than
  percentage change in price
• Raise Price quantity demanded falls more
• Higher price, lower total revenue
• Lower Price quantity demanded rises more
• Lower price, higher total revenue

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Example of Elastic Demand and Total Revenue

• Price of Tim Hortons coffee Rises 10 from .95
  to 1.05
• Quantity Falls 20 from 110 to 90 cups per hour
• Elasticity 20/10 2
• Total Revenue before the price rise
• .95 110 104.50
• Total Revenue after the price rise
• 1.05 90 94.50

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Inelastic Demand and Total Revenue

• Inelastic Demand Elasticity lt 1
• Percentage change in quantity is less than
  percentage change in price
• Raise Price quantity demanded falls less
• Higher price, higher total revenue
• Lower Price quantity demanded rises less
• Lower price, lower total revenue

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Example of Inelastic Demand and Total Revenue

• Price of gasoline Rises 10 from 66.5 cents to
  73.5 cents
• Quantity Falls 5 from 205 to 195 liters per hour
• Elasticity 5/10 .5
• Total Revenue before the price rise
• .665 205 136.33
• Total Revenue after the price rise
• .735 195 143.33

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Unit Elasticity

• Percentage change in quantity equals percentage
  change in price
• Total revenue does not change.

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Unit Elasticity
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Example of Unit Elasticity and Total Revenue

• Price of gasoline Rises 10 from 66.5 cents to
  73.5 cents
• Quantity Falls 10 from 210 to 190 liters per
  hour
• Elasticity 10/10 1
• Total Revenue before the price rise
• .665 210 139.65
• Total Revenue after the price rise
• .735 190 139.65

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Zero Elasticity

• Zero Elasticity Elasticity 0
• Percentage change in quantity zero regardless of
  percentage change in price
• An extreme case of inelastic demand.
• A Rise in price results in a proportionate rise
  in total revenue
• A fall in price results in a proportionate fall
  in total revenue

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Zero Elasticity
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Infinite Elasticity

• Percentage change in quantity is unlimited
  however small the percentage change in price
• An extreme case of elastic demand.
• A rise in price results in fall total revenue to
  zero because quantity demanded falls to zero
• A fall in price results in an unlimited rise in
  total revenue, because quantity demanded rises
  without limit
• (but you must be able to procure an unlimited
  quantity to sell an unlimited quantity)

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Infinite Elasticity