Price Elasticity Total Revenue and Demand Curves Elasticity

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Price Elasticity, Total Revenue and Demand Curves

Price Elasticity, Total Revenue and Demand Curves

Elasticity Calculation Q avg. Q P avg. P Q 2 -Q 1 Q 2+Q

Elasticity Calculation Q avg. Q P avg. P Q 2 -Q 1 Q 2+Q 1 P 2 -P 1 P 2+P 1

Elasticity and Slope Elasticity Q Q avg. Q = _____ * P P avg.

Elasticity and Slope Elasticity Q Q avg. Q = _____ * P P avg. P • Slope P Q avg. P _____ avg. Q

Drawing Demand Curves • On one diagram, at the same price level, a flatter

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

Total Revenue and Demand

Total Revenue and Demand

Total Revenue and Demand along a straight line • At a high price a

Total Revenue and Demand along 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

Total Revenue and Demand along a straight line • At a low price a

Total Revenue and Demand along 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

Types of Elasticity • • • Elastic: when coefficient > 1 Unit Elasticity: when

Types of Elasticity • • • Elastic: when coefficient > 1 Unit Elasticity: when coefficient = 1 Inelastic: when coefficient < 1 Zero Elasticity: when coefficient = 0 Infinite Elasticity: when coefficient = ∞

Elastic Demand Total Revenue • Elastic Demand: Elasticity > 1 • Percentage change in

Elastic Demand Total Revenue • Elastic Demand: Elasticity > 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

Example of Elastic Demand Total Revenue • Price of Tim Horton’s coffee Rises 10%

Example of Elastic Demand Total Revenue • Price of Tim Horton’s 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

Inelastic Demand Total Revenue • Inelastic Demand: Elasticity < 1 • Percentage change in

Inelastic Demand Total Revenue • Inelastic Demand: Elasticity < 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

Example of Inelastic Demand Total Revenue • Price of gasoline Rises 10% from 66.

Example of Inelastic Demand 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

Unit Elasticity • Percentage change in quantity equals percentage change in price • Total

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

Unit Elasticity

Unit Elasticity

Example of Unit Elasticity and Total Revenue • Price of gasoline Rises 10% from

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

Zero Elasticity • Zero Elasticity: Elasticity = 0 • Percentage change in quantity zero

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

Zero Elasticity

Zero Elasticity

Infinite Elasticity • Percentage change in quantity is unlimited however small the percentage change

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)

Infinite Elasticity

Infinite Elasticity