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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
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
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
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
a. elasticity of demand
b. unit-elastic demand
c. inelastic demand
d. elastic demand Reviewing Facts and
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
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
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
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
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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