total revenue (tr) tr = p x q tr and e d are related if tr changes in the opposite direction from...
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Total revenue (TR) TR = P x Q
TR and Ed are related If TR changes in the opposite direction
from price, demand is elastic If TR changes in the same direction from
price, demand is inelastic If TR does not change when price
changes, demand is unit elastic© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 1
$3
2
1
0 10 20 30 40Q
P
Loss
Gain
a
b
D1
• Lower price and elastic demand• Blue gain exceeds yellow loss
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 2
$4
3
2
1
0 10 20 Q
P
Loss
Gain
c
d
D2
• Lower price and inelastic demand• Yellow loss exceeds blue gain
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 3
$3
2
1
0 10 20 30 Q
P
Loss
Gain
e
f
D3
• Lower price and unit elastic demand• Blue gain equals yellow loss
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 4
(1)Total Quantity of
Tickets Demanded per Week, Thousands
(2)Price per
Ticket
(3)Elasticity
Coefficient (Ed)
(4)Total
Revenue
(1) X (2)
(5)Total
Revenue Test
1 $8 $8,000
2 7 5.00 14,000 Elastic
3 6 2.60 18,000 Elastic
4 5 1.57 20,000 Elastic
5 4 1.00 20,000 Unit Elastic
6 3 0.64 18,000 Inelastic
7 2 0.38 14,000 Inelastic
8 1 0.20 8,000 Inelastic© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 5
0 1 2 3 4 5 6 7 8
0 1 2 3 4 5 6 7 8
Quantity Demanded
Quantity Demanded
Pri
ceTota
l R
evenue
(Thousa
nds
of
Dolla
rs)
$20
1816141210
8642
$87654321
a
bc
de
fg
h
ElasticEd > 1
Unit ElasticEd = 1
InelasticEd < 1
D
TR
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 6
For all straight-line and most other demand curves Demand is more elastic toward the
upper left Demand is less elastic toward the
lower right
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 7
Absolute value of elasticity coefficient
Impact on total revenue of a
Demand is Description Price increase Price decreaseGreater than 1 (Ed > 1)
Elastic or relatively elastic
Quantity demanded changes by a larger percentage than does price
Total revenue decreases
Total revenue increases
Equal to 1 (Ed = 1)
Unit or unitary elastic
Quantity demanded changes by the same percentage as does price
Total revenue is unchanged
Total revenue is unchanged
Less than 1 (Ed < 1)
Inelastic or relatively inelastic
Quantity demanded changes by a smaller percentage than does price
Total revenue increases
Total revenue decreases© 2013 McGraw-Hill Ryerson
Ltd. Chapter 4, LO2 8
Substitutability Proportion of Income Luxuries versus Necessities Time
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 9
Product or service
Coefficient of price
elasticity of demand, Ed
Product or service
Coefficient of price
elasticity of demand, Ed
Newspapers0.10
Household appliances
0.63
Electricity (household)
0.13 Movies 0.87
Bread 0.15 Beer 0.90Major league baseball tickets
0.23 Shoes 0.91
Telephone service 0.26 Motor vehicles 1.14Sugar 0.30 Beef 1.27Eggs
0.32China, glassware, tableware
1.54
Legal services 0.37 Residential land 1.60Automobile repair 0.40 Restaurant meals 2.27Clothing 0.49 Lamb and mutton 2.65Gasoline 0.60 Fresh peas 2.83Milk 0.63
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 10
Large Crop Yields Sales Taxes Decriminalization of Illegal Drugs
© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 11