elasticity 2

# elasticity 2 - Elasticity and total expenditure or total...

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1 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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2 Elasticity and Total Revenues
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elasticity 2 - Elasticity and total expenditure or total...

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