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19 Wednesday, October 11, 2006

# 19 Wednesday, October 11, 2006 - product(TR = P x Q P TR 15...

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Wednesday, October 11, 2006 Microeconomics TWO ROLES FOR THE PRICE ELASTICITY OF DEMAND 1. Characterization of points along a demand curve 2. Characterization of a demand curve (a – b = b – a) same thing P 6 A Elastic 5 B 4 C Unit Elastic 3 D 2 E Inelastic 1 F D 2 4 6 8 10 12 Q Q 2 d – Q 1 d 4 – 2 2 1 -11 x Q 2 d + Q 1 d 4 + 2 6 3 1 E d,p a to b = = = = = 3.7 Elastic P 2 – P 1 5 – 6 -1 P 2 + P 1 5 + 6 11 Q 2 d – Q 1 d 8 – 6 2 1 Q 2 d + Q 1 d 8 + 6 14 7 E d,p c to d = = = = = -1 Unit Elastic P 2 – P 1 3 – 4 -1 -1 P 2 + P 1 3 + 4 7 7 Q 2 d – Q 1 d 12 – 10 2 1 -3 x Q 2 d + Q 1 d 12 + 10 22 11 1 -3 E d,p e to f = = = = = = -.2727 Inelastic P 2 – P 1 1 – 2 -1 11 P 2 + P 1 1 + 2 3

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Wednesday, October 11, 2006 Top of Demand Curve = E d,p > 1 Middle of Demand Curve = E d,p = 1 Bottom of Demand Curve = E d,p < 1 ELASTICITY AND TOTAL REVENUE TOTAL REVENUE is total amount that producers receive from selling a particular
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Unformatted text preview: product (TR = P x Q) P TR 15 12 9 135 6 120 3 75 D 5 10 15 20 25 Q 5 10 15 20 25 Q TR = P > Q = Inelastic TR = P < Q = Elastic If in increase in price wins out over a decrease in quantity, it follows that % ∆ Q d < % ∆ P ( E d,p < 1 and demand is inelastic) and TR will increase. If the decrease in quantity over the increase in Price, it follows that % ∆ Q d > % ∆ P ( E d,p > 1 and demand is elastic) and TF will decrease. TR is highest when demand is unit elastic P P Elastic TR TR TR = P x Q TR = P x Q Inelastic TR TR % ∆ Q d % ∆ Q d Unit elastic TR -TR - E d,p = E d,p = % ∆ P % ∆ P...
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