The Use of Price Elasticity of Demand

1
The Use of Price Elasticity of Demand

• Why Elasticity matters?

2
Elasticity, Total Revenue, and Demand

• The elasticity of demand tells suppliers how
  their total revenue will change if their price
  changes.
• Total revenue equals total quantity sold
  multiplied by price of good.

3
Elasticity, Total Revenue, and Demand

• If ED is elastic (ED gt 1), a rise in price lowers
  total revenue.

• Price and total revenue move in opposite
  directions.

4
Elasticity, Total Revenue, and Demand

• If ED is unit elastic (ED 1), a rise in price
  leaves total revenue unchanged.

5
Elasticity, Total Revenue, and Demand

• If ED is inelastic (ED lt 1), a rise in price
  increases total revenue.

• Price and total revenue move in the same
  direction.

6
Elasticity and Total Revenue
Unit Elastic Demand E 1
TRE 4x624 TRF 6x424
TR constant
C
E
A
B
7
Elasticity and Total Revenue
Inelastic Demand E lt 1
10
TR rises if price increases
8
TRG 1 x 9 9
TRH 2 x 8 16
6
Price
4
H
2
C
G
A
B
Quantity
0
1
2
3
4
5
6
7
8
9
8
Elasticity and Total Revenue
Elastic Demand E gt 1
10
C
TR falls if price increases.
8
TRJ 8 x 2 16 TRK 9 x 1 9
6
A
Price
4
2
0
Quantity
1
2
3
4
5
6
7
8
9
9
Total Revenue Along a Demand Curve

• With elastic demand a rise in price lowers
  total revenue.
• With inelastic demand a rise in price increases
  total revenue.

10
Total Revenue Along a Demand Curve
Elastic ED gt 1
ED 1
Inelastic ED lt 1
Total revenue
0
Quantity
11
Relationship Between Elasticity and Total Revenue
7-11
12
Elasticity of Individual and Market Demand

• Price discrimination occurs when a firm separates
  the people with less elastic demand from those
  with more elastic demand.

13
Elasticity of Individual and Market Demand

• Firms that price discriminate charge more to the
  individuals with inelastic demand and less to
  individuals with elastic demands.

14
Elasticity of Individual and Market Demand

• Examples of price discrimination include

• Airlines Saturday stay-over specials.
• The phenomenon of selling new cars.
• The almost-continual-sale phenomenon.