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M2 - Chapter 12 - Additional Differentiation Topics - Theory
M2 - Chapter 12 - Additional Differentiation Topics - Theory
Convention:
- Horizontal axis: q-axis
- Vertical axis: p-axis
Example. Find the point elasticity of demand for the demand function p = 1200 -
q². Evaluate it for q = 10. If price were to increase by 1%, what would be the
change in demand? And if price decreased by 0.5%?
Objective 3. To understand the relationship between elasticity and revenue
Elasticity of demand affects changes in revenue (marginal revenue).
Hence, total revenue r is increasing on intervals for which demand is elastic, and total
revenue is decreasing on intervals for which demand is inelastic. Thus, we conclude from the
preceding argument that as more units are sold, a manufacturer’s total revenue increases if
demand is elastic but decreases if demand is inelastic. That is, if demand is elastic, a lower
price will increase revenue. This means that a lower price will cause a large enough increase
in demand to actually increase revenue. If demand is inelastic, a lower price will decrease
revenue. For unit elasticity, a lower price leaves total revenue unchanged.
Ex. If you owned a coffee shop and wanted to increase your prices, this ‘responsiveness’ is
something you need to consider. When you increase prices, you know quantity will fall, but by
how much?
If we were to calculate elasticity at every point on a demand curve, we could divide it into these
elastic, unit elastic, and inelastic areas, as shown below. This means the impact of a price
change will depend on where we are producing.
ff
b) Is q a uniquely de ned function of p?
c) Find dq/dp for p = 2.
d) Estimate q if p = 2.01.
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13
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- Evaluate higher order derivatives.
*We can skip higher order implicit di erentiation