price, demand is said to be inelastic; if consumers change their purchasing behavior a lot in response
to a small change in price, demand is said to be elastic.
The price elasticity of demand is the percentage change in quantity divided by the percentage change
in price. According to the midpoint method, you can compute the percentage change in quantity
demanded between points A and B in the following way:
Percentage Change in Quantity
Percentage Change i
n Quantity
=
=
100×
Q2−Q1Q2+Q12
100×Q2−Q1Q2
+Q12
=
=
100×
54−4854+482
100×54−4854+4
82
=
=
100×0.1176
100×0.1176
=
=
11.76%
11.76%
You can also calculate the percentage change in price between points A and B in the following way:
Percentage Change in Price
Percentage Change
in Price
=
=
100×
P2−P1P2+P12
100×P2−P1P2+P12
=
=
100×
$10−$20$10+$202
100×$10−
$20$10+$202
=
=
100×(−0.6667)
100×−0.6667
=
=
−66.67%
−66.67%
The price elasticity of demand is the percentage change in quantity demanded divided by the
percentage change in price (ignoring the negative sign):
Price Elasticity of Demand
Price Elasticity of Demand
=
=
Percentage Change in QuantityPercentage Change in Pric
e
Percentage Change in QuantityPercentage Change in Price
=
=
11.76%66.67%
11.76%66.67%
=
=
0.18
0.18
Since the price elasticity of demand is less than 1, demand is inelastic between these two points.
Suppose the price of bikes is currently $10 per bike, shown as point B on the initial graph. Because the
demand between points A and B is
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elastic
, a $10-per-bike increase in
price will lead to
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an increase
in total revenue per day.

Points:
0.5 / 1
Close Explanation
Explanation:
Recall that the price elasticity of demand between points A and B is 0.18. This means that the
elasticity between these two points is less than 1. Therefore, demand is inelastic between these two
points.
Total revenue
is equal to price times quantity. When price increases by $10 per bike, quantity
demanded decreases from 54 to 48 bikes per day, and total revenue rises from $540 to $960 per day.
Holding everything else constant, an increase in price will increase total revenue, but a decrease in
quantity will decrease total revenue. When demand is inelastic, such as between points A and B, the
increase in price is large enough to more than offset the decrease in quantity. Therefore, the net effect
is that total revenue rises.
In general, in order for a price decrease to cause a decrease in total revenue, demand must be
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Filename not specified.
inelastic
.
Points:
1 / 1
Close Explanation