Microeconomics Chapter 6: Elasticity and Total Revenue

The Relationship between Price Elasticity of Demand and Total Revenue

Total Revenue and Elasticity

There are three possible scenarios:

• Elastic Demand: When demand is elastic, a small price decrease will lead to a substantial increase in quantity demanded, resulting in higher total revenue.
• Inelastic Demand: If demand is inelastic, a small price decrease will lead to a small increase in quantity demanded, resulting in lower total revenue.
• Unit Elastic Demand: In this case, a small price decrease will lead to a proportionate increase in quantity demanded, leaving total revenue unaffected.

is the total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.

• The relationship between price elasticity of demand and total revenue is important for businesses to understand.

Determining the Price Elasticity of Demand

• The price elasticity of demand for DVDs was uncertain when they were first introduced, and movie studios conducted market experiments to determine it.
• The experiments showed the price elasticity of demand for different DVD titles.

Cross-Price Elasticity of Demand

• Cross-price elasticity of demand is the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

• It measures how

  Determining the Price Elasticity of Demand

  Understanding the price elasticity of demand is crucial for businesses to make informed decisions about their pricing strategies. When DVD players and DVDs were first introduced, the movie studios were uncertain about the price elasticity of demand for DVDs. To determine this, they conducted market experiments, varying the prices of different DVD titles and observing the subsequent changes in demand. The results of these experiments provided valuable insights into the price elasticity of demand for different DVD titles, enabling the studios to set optimal prices and maximize their revenue.

  Cross-Price Elasticity of Demand

  Cross-price elasticity of demand, on the other hand, measures the responsiveness of the demand for one good to changes in the price of another good. It is calculated as the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good. For instance, if the price of Blu-ray discs increases, the demand for DVDs may also be affected. By understanding the cross-price elasticity of demand, businesses can anticipate how changes in the price of one product will influence the demand for another product, enabling them to develop effective pricing strategies and stay competitive in the market.

  the demand for one good is to changes in the price of another good.

Summary of Cross-Price Elasticity of Demand

• The cross-price elasticity of demand can be positive, negative, or zero, depending on the relationship between the two goods.

The Price Elasticity of Supply and Its Measurement

• Price elasticity of supply is the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied by the percentage change in the product's price.
• It measures how responsive the supply of a good is to changes in its price.

Determinants of the Price Elasticity of Supply Cross-price elasticity of demand measures how responsive the demand for one good is to changes in the price of another good. It's calculated as the percentage change in quantity demanded in response to a percentage change in price of another good. This concept helps businesses anticipate how price changes affect demand for related products, enabling them to develop effective pricing strategies and stay competitive.

The demand for one good is affected by changes in the price of another good in various ways. For example, if the price of coffee increases, the demand for tea may increase as consumers switch to a substitute product. On the other hand, if the price of cars increases, the demand for gasoline may also increase as people are forced to own cars despite the higher prices. By analyzing the cross-price elasticity of demand, businesses can identify opportunities to bundle products, offer discounts, or adjust their pricing strategies to maximize profits.

Understanding cross-price elasticity is crucial in making informed decisions about product development, marketing, and pricing. It helps businesses to identify opportunities to expand their product lines, improve their market share, and stay ahead of competitors. By analyzing the cross-price elasticity of demand, businesses can develop targeted marketing campaigns, optimize their pricing strategies, and ultimately drive revenue growth.

• The price elasticity of supply depends on the ability and willingness of firms to alter the quantity they produce as price increases.
• Firms may have difficulty increasing the quantity of the product they supply during a short period of time, making supply inelastic.

Why Are Oil Prices So Unstable?

• The price elasticity of supply is important for understanding price instability in markets, such as the oil market.

Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply

• Perfectly elastic supply means that even a small price change will lead to an infinite quantity supplied.
• Perfectly inelastic supply means that even a large price change will not lead to a change in the quantity supplied.