chapter 7-2 - Elasticity, Total Revenue, and Demand The Use...

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1 The Use of Price Elasticity of Demand Why Elasticity matters? Elasticity, Total Revenue, and Demand • The elasticity of demand tells suppliers how their total revenue will change if their price changes. Total revenue equals total quantity sold multiplied by price of good. Elasticity, Total Revenue, and Demand • If E D is elastic ( E D > 1), a rise in price lowers total revenue. • Price and total revenue move in opposite directions. Elasticity, Total Revenue, and Demand • If E D is unit elastic ( E D = 1), a rise in price leaves total revenue unchanged.
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2 Elasticity, Total Revenue, and Demand • If E D is inelastic ( E D < 1), a rise in price increases total revenue. • Price and total revenue move in the same direction. Elasticity and Total Revenue A Unit Elastic Demand E = 1 TR constant C 0 6 Price Quantity $10 8 6 4 2 12345 789 B E Lost revenue F Gained revenue TR E = $4x6=$24 TR F = $6x4=$24 Elasticity and Total Revenue A Inelastic Demand E < 1 Quantity $10 8 6 4 2 0 1234567 8 9 TR rises if price increases C H G Lost revenue Gained
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chapter 7-2 - Elasticity, Total Revenue, and Demand The Use...

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