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At a price of $30 per bippitybop, consumers will purchase 100 bippitybops per day.
Total revenue is equal to price times quantity. At a price of $30 per bippitybop, you can compute total revenue in the following way:
Total Revenue = Price×Quantity
= $30 per bippitybop×100 bippitybops per day
= $3,000 per day
Therefore, the first point on the total revenue curve is (30, 3,000). Using the same method, you can find total revenue at each of the prices listed in the
following table:
Price Quantity Total Revenue
($/per bippitybop). (Bippitybops per day). (Dollars)
30 100 3,000
45 90 4,050
60 80 4,800
75 70 5,250
90 60 5,400
105 50 5,250
120 40 4,800
- 1.67
The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their
purchasing behavior a lot in response to a small change in price, demand is said to be elastic.
The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in quantity demanded between points A and B in the following way:
Percentage Change in Quantity = 100×Q2−Q1 / Q2+Q1 / 2
= 100×50−40 / 50+40 / 2
= 100×0.2222= 22.22%
You can also calculate the
percentage change in price between points A and B in the following way:
Percentage Change in Price= 100 × P2−P1 / P2+P1 / 2
= 100×$105−$120/$105+$120/ 2
= 100×(−0.1333) = −13.33%
The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price (ignoring the negative sign):
Price Elasticity of Demand= Percentage Change in Quantity/Percentage Change in Price
= 22.22% / 13.33%
= 1.67
Since the price elasticity of
demand is greater than 1, demand is elastic between these two points.
-ELASTIC, INCREASE
Recall that the price elasticity of demand between points A and B is 1.67. This means that the elasticity between these two points is greater than 1. Therefore, demand is elastic between these two points.
Total revenue is equal to price times quantity. When price decreases by $15 per bippitybop, quantity demanded increases from 40 to 50 bippitybops per day, and total revenue rises from $4,800 to
$5,250 per day. Holding everything else constant, a decrease in price will decrease total revenue, but an increase in quantity will increase total revenue. When demand is elastic, such as between points A and B, the increase in quantity is large enough to more than offset the decrease in price. Therefore, the net effect is that total revenue rises.
- ELASTIC .
When demand is inelastic, price and total revenue move in the same direction. This happens because in elastic demand means that
consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic:
Price Elasticity of Demand < 1
Percentage Change in Quantity / Percentage Change in Price < 1
Percentage Change in Quantity < Percentage Change in Price
Total revenue is equal to price times
quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is dominant.When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; and when price decreases, total revenue
decreases as well.When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; and when price increases, total revenue decreases.Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction, since the
percentage change in quantity demanded is equal to the percentage change in price.