PART I HOM/MARETS WORK total revenue the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold have taled about what elasticity means, what determines it, and how tis calculated. Beyond these ge ask fora specifi number How much, precise, does the rice ofa par- canbe useful when comparing ticular good influence the quantity demanded? maths case, regardless of the price, the quantity demanded stays the same. As the elas- ticity rises, the demand curve gets flatter and flatter, as shown in panels (b), (©), and (d). At the opposite extreme, shown in panel (e), demand is perfectly elastic. This occurs as the price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that very small changes in the price lead to huge changes in the quantity demanded. Finally, if you have trouble keeping straight the terms elastic and inelastic, here's a memory trick for you: Inelastic curves, such as in panel (a) of Figure 1, look like the letter I This is not a deep insight, but it might help you on your next exam. 5-1e Total Revenue and the Price Elasticity of Demand When studying changes in supply or demand in a market, one variable we of- ten want to study is total revenue, the amount paid by buyers and received by sellers of a good. In any market, total revenue is P x Q, the price of the good times the quantity of the good sold. We can show total revenue graphically, as in Figure 2. The height of the box under the demand curve is P, and the width is Q. ‘The area of this box, P x Q, equals the total revenue in this market. In Figure 2, where P = $4 and Q = 100, total revenue is $4 x 100, or $400 How does total revenue change as one moves along the demand curve? The answer depends on the price elasticity of demand. If demand is inelastic, as in panel (a) of Figure 3, then an increase in the price causes an increase in total rev- enue, Here an increase in price from $4 to $5 causes the quantity demanded to fall from 100 to 90, so total revenue rises from $400 to $450, An increase in price raises PX Q because the fall in Q is proportionately smaller than the rise in P. In other A Few Elasticities from the Real World These kinds of numbers are ideas, you might fun to think about, an they Ta answer such 2 question, economists collect date fom market Nonetheless, one shaul ake these estimates with a rain of salt. ‘outcomes and apply statistical techniques to estimate the price elas- One reason i that te statistical techniques used to obtain them re ticity of demand. Here are some pie elasticities of demand, obtained quire some assumptions abou the word, and these assumption might ‘tom various tues, fra range of goods: ‘ot be true in practice (The deta ofthese techniques are Beyond the Scape ofthis book, but you wll encounter them ifyou take a course Eggs on in ecanomtics.) Another reason is thatthe pie elatetyof demand Healthcare 02 need not be the same a all points on a demand cure, as we wil see Rice 05 shortly inthe case ofa linear demand curve. Far both reasons, you Housing 07 should net be surprised if eitferent studies report itferent price elas Beef 16 tities of demand forthe same goad. Restaurant Meals 23 Mountain Dew 4aCHAPTERS EUSTIIY NOTTS APLIONTION 95 Price FIGURE 2 Total Revenue ‘The total amount paid by buy- rs, and received as revenue by sellers, equals the area ofthe box under the demand eure, Px Q Here, aa price of $4, the quantity demanded is 100 and total revenue is $400. sir}. The impact pice change on ttl revenue te product of pce and quantity) depends on the lat of comand: In panel (te demand curv sina. n ti cas, an erate FIGURE 3 Int ca eadc ba cnt In quay deranded tat propia sale 2 revere neatsex Hare an [tas inthe pica $4 to $5 atin the quanti dranded Tora fom 100 to 80 Total revenue rises rom $400 to $450 In pane (te demand care I eat, n this cae, an increas inthe pre eas toa daceas n quantity demanded thats proportionately ler octal revere decestes Here an increase nthe price fom $4t $5 ‘ase the quaniy demanded ffl em 100 70. Toll ever fas rm 400 to $350, How Total Revenue Changes When Price Changes (2) The Cate of elastic Demand. (b) The Case of Hastic Demand 2. the xa revenge hom selirg at ahigher pce Price | Price (N ttenedenard cn inate 2... che ena ever fom 1 When the dra seling 3: ighe pce cine ete 8 ‘8 KIEL ILIKE LILI IRI NNN eee Pease eS Ree ee oe IN eee ee Denard Denard RRO Nt Bese SOR BESSA ‘ unity 0 yo ioe Quantity 2... genie tan teense 2. le than heat venue rm sling fewer ui. ‘tom sling ener unis