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Lecture 10

# ECON 101 Lecture 10: Elasticity in Relation to Total Revenue and More Types of ElasticitiesPremium

4 pages93 viewsWinter 2015

Department
Economics
Course Code
ECON 101
Professor
Lecture
10

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ECON 101 - Lecture #10 - Elasticity in Relation to Total Revenue and More Types of
Elasticities
Interpreting Numerical Elasticities
The price elasticity of demand is placed into the following categories
0 - perfectly inelastic (quantity demand will not change no matter how much price
changes)
less than one - inelastic (quantity demand will change to a smaller proportion
than a change in price)
1 = unit elastic (quantity demanded change the same amount as price change)
more than 1 - elastic (quantity demanded change more than price change)
infinity - perfectly elastic (demand becomes 0 when the price rises a little bit)
Note: it is important not to confuse perfectly inelastic with inelastic, and perfectly elastic
with elastic
The flatter the line is, the more responsive quantity demanded is to change in price
Question
Price elasticity for cheese in US is 0.60, while it is 1.36 in UK. What could be the reason
for that?
Possible factors that influence elasticity are the availability of substitutes. However, the
living conditions in US and UK do not differ and thereby the number of substitutes should
not differ by much
Answer: the price between two cheese in two countries are different
Total Revenue
Whenever there is a change in price, let’s say it decreases, there are two factors
influencing total revenue
Positive: quantity demanded increase (revenue rises)
Negative: price decreases (revenue decreases)
To see if total revenue decreases or increases, we need to measure the proportion of the
positive and negative effects
That is, to compare which effect is stronger, positive or negative effect
1) When quantity demanded increases in a larger proportion than the decrease in price, the
total revenue increases
a) Elastic
2) When quantity demanded increases in the same proportion than the decrease in price,
the total revenue is the same
a) Unit elastic
b) Maximum has been reached, the price should be the same
3) When quantity demanded increases in a smaller proportion than the decrease in price,
the total revenue increases
a) Inelastic
b) Price should rise to increase revenue