lectur17 - 1 Price Elasticity of Demand Price Elasticity of...

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Unformatted text preview: 1 Price Elasticity of Demand Price Elasticity of Demand Lecture #2 Lecture #2 2 As We Move Down the Demand As We Move Down the Demand curve, curve, TOTAL REVENUE first increases, first increases, reaches a maximum (or peak), and then reaches a maximum (or peak), and then decreases. decreases. TR Qd 3 Another Curve Ball Folks! Another Curve Ball Folks! All downward sloping linear demand curves can be divided into 3 distinct sections that differ in elasticity. 4 P Qd/ut Ed > 1 Elastic Section Ed = 1 Unitary Elastic Section Ed < 1 Inelastic Section TR Qd/ut 5 Price Changes: Price Changes: If a price change causes TR to move in the opposite direction from the price change, we are in the elastic portion of the demand curve. 6 Price Changes: Price Changes: Therefore, if P TR or if P TR Elastic Section of Demand Curve 7 Price Changes: Price Changes: If a price change causes TR to move in the same direction as the price change, we are in the inelastic portion of the demand curve. 8 Price Changes: Price Changes: Therefore, if P TR or if P TR Inelastic Section of Demand Curve 9 Remember: Remember: P Q P Q Relatively inelastic Relatively elastic 10 The two demand curves have the 3 sections of elasticity We use the terms relatively inelastic or elastic here as a means of saying that over the whole range (3 sections) the average elasticity of demand is either inelastic or elastic. 11 Remember: Remember: P Q P Q Relatively inelastic Relatively elastic- 1.10- .15- 5.50- .95 Avg. = - .625 Avg. = - 3.225 12 AND, AND, When: Ed > 1 elastic demand TR with a P Ed = 1 unitary demand TR is maximized....
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This note was uploaded on 02/19/2010 for the course ECON 1313212 taught by Professor John during the Spring '09 term at The School of the Art Institute of Chicago.

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lectur17 - 1 Price Elasticity of Demand Price Elasticity of...

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