The use of elasticity

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The use of elasticity

  1. 1. The Use of Price Elasticity of Demand<br />Why Elasticity matters?<br />Better than chapter 6-2<br />
  2. 2. Elasticity, Total Revenue, and Demand<br />The elasticity of demand tells suppliers how their total revenue will change if their price changes.<br />Total revenue equals total quantity sold multiplied by price of good.<br />
  3. 3. Elasticity, Total Revenue, and Demand<br />If ED is elastic (ED > 1), a rise in price lowers total revenue.<br /><ul><li>Price and total revenue move in opposite directions.</li></li></ul><li>Elasticity, Total Revenue, and Demand<br />If ED is unit elastic (ED = 1), a rise in price leaves total revenue unchanged.<br />
  4. 4. Elasticity, Total Revenue, and Demand<br />If ED is inelastic (ED< 1), a rise in price increases total revenue.<br /><ul><li>Price and total revenue move in the same direction.</li></li></ul><li>Elasticity and Total Revenue<br />$10<br />8<br />F<br />Gained revenue<br />6<br />Price<br />Lost revenue <br />4<br />2<br />0<br />6<br />Quantity<br />1<br />2<br />3<br />4<br />5<br />7<br />8<br />9<br />Unit Elastic Demand<br />E = 1<br />TRE= $4x6=$24<br />TRF= $6x4=$24<br />TR constant<br />C<br />E<br />A<br />B<br />
  5. 5. Elasticity and Total Revenue<br />Gained revenue<br />Lost revenue <br />Inelastic Demand<br />E < 1<br />$10<br />TR rises if price increases<br />8<br />TRG = $1 x 9 = $9<br />TRH = $2 x 8 = $16<br />6<br />Price<br />4<br />H<br />2<br />G<br />C<br />A<br />B<br />0<br />8<br />Quantity<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />9<br />
  6. 6. Gained revenue<br />J<br />Elasticity and Total Revenue<br />K<br />Lost revenue <br />B<br />Elastic Demand<br />E > 1<br />$10<br />C<br />TR falls if price increases.<br />8<br />TRJ = $8 x 2 = $16<br />TRK = $9 x 1 = $9<br />6<br />A<br />Price<br />4<br />2<br />0<br />Quantity<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />8<br />9<br />
  7. 7. Total Revenue Along a Demand Curve<br />With elastic demand – a rise in price lowers total revenue.<br />With inelastic demand – a rise in price increases total revenue.<br />
  8. 8. Q0<br />Price<br />0<br />Quantity<br />Q0<br />Elastic ED > 1<br />Total Revenue Along a Demand Curve<br />ED = 1<br />Inelastic ED< 1<br />Total revenue<br />0<br />Quantity<br />
  9. 9. Elasticity of Individual and Market Demand<br />Price discrimination occurs when a firm separates the people with less elastic demand from those with more elastic demand.<br />
  10. 10. Elasticity of Individual and Market Demand<br />Firms that price discriminate charge more to the individuals with inelastic demand and less to individuals with elastic demands.<br />
  11. 11. Elasticity of Individual and Market Demand<br />Examples of price discrimination include:<br /><ul><li>Airlines’ Saturday stay-over specials.
  12. 12. The phenomenon of selling new cars.
  13. 13. The almost-continual-sale phenomenon.</li>

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