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Elasticity and total expenditure
or total revenue (TR=P*Q)
• When price elasticity > 1, changes in
price and changes in total expenditure
move in opposite directions
• When price elasticity < 1, changes in
price and changes in total expenditure
move in the same direction
Elasticity and total revenue
P
Q
D
ε
= infinity
P
Q
D
ε
= 0
Perfectly elastic demand
Perfectly inelastic demand
Increase the price,
Q
D
falls to zero,
revenue falls to zero
Increase price,
no change in Q
D
,
increase in revenue
The relationship between elasticity
and revenue (TR=P*Q)
•
Elastic demand (e=2) :
TR=P(1+.05)*Q(1.10)=(1.05)(.90)PQ=.945PQ
As price increases, revenue decreases.
P
Q
D
P
1
Q
1
The relationship between elasticity
and revenue (TR=P*Q)
•
Inelastic demand (e=.5):
TR=P(1+.10)*Q(1.05)=(1.10)(.95)PQ=1.045PQ
As price increases, revenue increases.
P
Q
D
P
1
Q
1
Elasticity and total revenue
P
Q
Pmax/2
Qmax / 2
ε
> 1: increasing price decreases revenue
ε
< 1: increasing price increases
revenue
Elasticity and Revenues
P
Q
D
R
Q
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Elasticity and Total Revenues
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 Spring '08
 TANG
 Price Elasticity

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