ECON2106_Feb5 - Tuesday February 5 2008 Elasticity and...

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Tuesday, February 5, 2008 Elasticity and Total Revenue Along a Linear Demand Curve With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases. o Not price sensitive, willing to pay any price (oil) o Producer can increase price o Total revenue will rise With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases. o Price sensitive o Total revenue will decrease o Greater than 1 elastic revenue decrease Different points in a straight linear demand curve have different elasticity Always a negative elasticity Other Demand Elasticities Income Elasticity of Demand o Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. o It is computed as the % change in quantity demanded divided by the % change in income.
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