1. The Use of Price Elasticity of Demand Why Elasticity matters? Better than chapter 6-2
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.
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5. Elasticity and Total Revenue Gained revenue Lost revenue Inelastic Demand E < 1 $10 TR rises if price increases 8 TRG = $1 x 9 = $9 TRH = $2 x 8 = $16 6 Price 4 H 2 G C A B 0 8 Quantity 1 2 3 4 5 6 7 9
6. Gained revenue J Elasticity and Total Revenue K Lost revenue B Elastic Demand E > 1 $10 C TR falls if price increases. 8 TRJ = $8 x 2 = $16 TRK = $9 x 1 = $9 6 A Price 4 2 0 Quantity 1 2 3 4 5 6 7 8 9
7. 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.
8. Q0 Price 0 Quantity Q0 Elastic ED > 1 Total Revenue Along a Demand Curve ED = 1 Inelastic ED< 1 Total revenue 0 Quantity
9. 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.
10. 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.
