Lets say you sell only 20000 tickets you have not

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Unformatted text preview: ase in total revenue. Javier’s total revenue went from 106 Chapter 4 Demand to $50. At this higher price you will not sell as many tickets as you sold when the price was $30 per ticket. Let’s say you sell only 20,000 tickets. You have not “sold out” the auditorium, but it doesn’t matter. At a price of $50 per ticket and 20,000 seats sold, total revenue is $1 million—or $100,000 more than it was when you sold out the auditorium.* Is a sold-out auditorium, then, better than an auditorium that is not sold out? Usually you would think so, but an understanding of elasticity of demand informs us that it may be better to sell fewer tickets at a higher price than to sell more tickets at a lower price. Who would have thought it? THINK ABOUT IT 1. You may not become a rock star, but you may run your own business someday. Explain why it will be important for you to understand elasticity of demand. 2. What basic economic concept that you learned in Chapter 1 is expressed by the Rolling Stones’ lyrics on this page? *This description assumes that only one ticket price, $30 or $50, can be charged. If more than one ticket price can be charged, then some seats may be sold for $30, some for $40, some for $50, and so on. $2,000 to $2,090 when he increased the price of basketballs from $20 to $22. Inelastic demand Price increase Total revenue increase 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 107 • Case 4: Inelastic Demand and a Price Decrease Demand is again inelastic, but Javier now lowers the price of his basketballs from $20 to $18, a 10 percent reduction in price. We know that if demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. Suppose quantity demanded rises from 100 to 105, a 5 percent increase. Total revenue at the new, lower price ($18) and higher quantity demanded (105) is $1,890. Thus, if demand is inelastic and price decreases, total revenue will decrease. EXHIBIT 4-6 Relationship of Elasticity of Demand to Total Revenue If Price Then Total revenue Elastic demand If Inelastic demand Price decrease Total revenue decrease If See Exhibit 4-6 for a summary of the four types of relationships between elasticity and revenue. Price Price Then Then Total revenue Total revenue Inelastic demand If Price Then Total revenue QUESTION: Most people seem to think that if a seller raises the price, the seller’s total revenue will automatically rise. But it isn’t always true, is it? ANSWER: No, it isn’t always true. If demand is inelastic (case 3), then a higher price will lead to a higher total revenue, but if demand is elastic (case 1), a higher price will lead to a lower total revenue. Defining Terms 1. Define: a. elasticity of demand b. unit-elastic demand c. inelastic demand d. elastic demand Reviewing Facts and Concepts 2. Does an increase in price necessarily bring about a higher total revenue? 3. The price of a good rises from $4 to$4.50, and as a result, total revenue falls If demand is elastic, price and total revenue move in opposite directions: as price goes up, total revenue goes down, and as price goes down, total revenue goes up. If demand is inelastic, price and total revenue move in the same direction: as price goes up, total revenue goes up, and as price goes down, total revenue goes down. from $400 to $350. Is the demand for the good elastic, inelastic, or unitelastic? 4. Good A has 10 substitutes, and good B has 20 substitutes. The demand is more likely to be elastic for which good? Explain your answer. Critical Thinking ferent from elasticity of demand? Applying Economic Concepts 6. A hotel chain advertises its hotels as “The Best Hotels You Can Find Anywhere.” Does this ad have anything to do with elasticity of demand? If so, what? 5. How is the law of demand (a) similar to and (b) dif- Section 3 Elasticity of Demand 107 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 108 Economics Vocabulary Chapter Summary Be sure you know and remember the following key points from the chapter sections. Section 1 Demand is the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. A market is any place where people come together to buy and sell goods and services. There are two sides to a market—demand and supply. The law of demand says that price and quantity demanded move in opposite directions. A demand curve graphically represents the law of demand. Section 2 An increase in demand for a good causes the demand curve to shift to the right. A decrease in demand causes a leftward shift in the demand curve. A change in demand may be caused by changes in income, people’s preferences, price of related goods, number of buyers, and future price expectations. A change in price is what causes quantity demanded to change. Section 3 Elasticity of demand deals with the relationship between price and quantity demanded. Demand is elastic when quantity demanded changes by a greater percentage than price. Demand is inelastic when quantity demanded changes by a sma...
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This document was uploaded on 01/16/2014.

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