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Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
18
Extensions of
Demand and
Supply Analysis
End Show
18-1
Copyright 2008 The McGraw-Hill Companies
Chapter Objectives
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
End Show
18-2
• Price Elasticity of Demand and
How It Can Be Applied
• The Usefulness of the Total
Revenue Test for Price
Elasticity of Demand
• Price Elasticity of Supply and
How It Can Be Applied
• Cross Elasticity of Demand and
Income Elasticity of Demand
• Consumer Surplus, Producer
Surplus, and Efficiency Losses
Copyright 2008 The McGraw-Hill Companies
Price Elasticity of Demand
• Measuring
Responsiveness to Price
Changes
• Relatively Elastic or
Inelastic
• Price-Elasticity Coefficient
and Formula
O 18.1
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
End Show
18-3
Ed =
Percentage Change in Quantity
Demanded of Product X
Percentage Change in Price
of Product X
Copyright 2008 The McGraw-Hill Companies
Price Elasticity of Demand
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
• Formula Restated
Ed =
18-4
Original Quantity Demanded of X
÷
Change in Price of X
Original Price of X
• Using Averages
• Midpoint Formula
Ed =
End Show
Change in Quantity Demanded of X
Change in Quantity
Sum of Quantities/2
Copyright 2008 The McGraw-Hill Companies
÷
W 18.1
Change in Price
Sum of Prices/2
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Price Elasticity of Demand
• Why Use Percentages?
• Elimination of the Minus
Sign
• Interpretations of Ed
Elastic Demand
Ed =
Ed =
Ed =
End Show
18-5
=2
.01
.02
= .5
.02
.02
=1
Inelastic Demand
Unit Elasticity
Key Terms
.04
.02
Copyright 2008 The McGraw-Hill Companies
Price Elasticity of Demand
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Extreme Cases
Perfectly Inelastic Demand
P
Q
Perfectly Elastic Demand
P
0
18-6
Perfectly
Inelastic
Demand
(Ed = 0)
0
Key Terms
End Show
D1
Copyright 2008 The McGraw-Hill Companies
Perfectly
Elastic
Demand
(Ed = ∞)
D2
Q
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
The Total Revenue Test
• Total Revenue (TR)
TR = P x Q
Elastic Demand
W 18.2
P
$3
a
2
b
1
D1
Key Terms
End Show
0
18-7
10
Copyright 2008 The McGraw-Hill Companies
20
30
40
Q
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
The Total Revenue Test
• Total Revenue (TR)
TR = P x Q
Inelastic
Demand
P
W 18.2
c
$4
3
2
d
1
Key Terms
End Show
D2
0
18-8
Copyright 2008 The McGraw-Hill Companies
10
20
Q
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
The Total Revenue Test
• Total Revenue (TR)
TR = P x Q
Unit-Elastic
W 18.2
P
e
$3
2
f
1
D3
Key Terms
End Show
0
18-9
Copyright 2008 The McGraw-Hill Companies
10
20
30
Q
Elasticity on a Linear
Demand Curve
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Price Elasticity of Demand for Movie G 18.1
Tickets as Measured by the Elasticity
Coefficient and the Total-Revenue Test
(1)
Total Quantity of
Tickets Demanded
Per Week, Thousands
1
2
3
4
5
6
Key Terms
7
End Show
8
18-10
(2)
Price Per Ticket
Copyright 2008 The McGraw-Hill Companies
8
]
7
]
6
]
5
]
4
]
3
]
2
]
1
(3)
Elasticity
Coefficient (Ed)
5.00
2.60
1.57
1.00
0.64
0.38
0.20
(4)
Total Revenue
(1) X (2)
$8,000
]
14,000
]
18,000
]
20,000
]
20,000
]
18,000
]
14,000
]
8,000
(5)
Total-Revenue
Test
Elastic
Elastic
Elastic
Unit Elastic
Inelastic
Inelastic
Inelastic
Graphically…
Key Terms
End Show
$8 a
7
b
6
c
5
d
4
e
3
f
2
g
1
Elastic
Ed > 1
Unit Elastic
Ed = 1
Inelastic
Ed < 1
h
Quantity Demanded
$20
18
16
14
12
10
8
6
4
2
Copyright 2008 The McGraw-Hill Companies
Elastic
Ed > 1
Unit Elastic
Ed = 1
TR
0 1 2 3 4 5 6 7 8
Quantity Demanded
18-11
D
0 1 2 3 4 5 6 7 8
Total Revenue
(Thousands of Dollars)
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Price
Price Elasticity and the TotalRevenue Curve
Inelastic
Ed < 1
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
End Show
18-12
•
•
•
•
•
Determinants of Price
Elasticity of Demand
Substitutability
Proportion of Income
Luxuries versus
Necessities
Time
Applications:
–Large Crop Yields
–Excise Taxes
–Decriminalization of Illegal
Drugs
Copyright 2008 The McGraw-Hill Companies
Price Elasticity of Supply
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Es =
Percentage Change in Quantity
Supplied of Product X
Percentage Change in Price
of Product X
Unit Elastic Supply
Es = 1
Market Period:
Not Enough Time to Shift Resources
P
Greatest
Price
Impact
Sm
Pm
P0
Key Terms
D1 D2
End Show
Q0
18-13
O 18.2
Copyright 2008 The McGraw-Hill Companies
Q
Price Elasticity of Supply
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Es =
Percentage Change in Quantity
Supplied of Product X
Percentage Change in Price
of Product X
Inelastic Supply
Es < 1
Short Run:
Resources Not Easily Shifted to Alternative Uses
P
Lower
Price
Impact
Ss
Ps
P0
Key Terms
D1 D2
End Show
Q0 Qs
18-14
O 18.2
Copyright 2008 The McGraw-Hill Companies
Q
Price Elasticity of Supply
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Es =
Percentage Change in Quantity
Supplied of Product X
Percentage Change in Price
of Product X
Elastic Supply
Es > 1
Long Run:
Resources Easily Shifted to Alternative Uses
P
Sl
Least
Price
Impact
Pl
P0
Key Terms
D1 D2
End Show
Q0 Ql
18-15
O 18.2
Copyright 2008 The McGraw-Hill Companies
Q
Price Elasticity of Supply
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
• Applications
–Antiques and
Reproductions
–Volatile Gold Prices
Key Terms
End Show
18-16
Copyright 2008 The McGraw-Hill Companies
Cross Elasticity of Demand
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
End Show
18-17
Exy =
Percentage Change in Quantity
Demanded of Product X
Percentage Change in Price
of Product Y
• Substitute Goods –
Positive Sign
• Complementary GoodsNegative Sign
• Independent Goods –
Zero or Near-Zero Value
Copyright 2008 The McGraw-Hill Companies
Income Elasticity of Demand
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
End Show
18-18
Ei =
Percentage Change in Quantity
Demanded
Percentage Change in Income
• Normal Goods –
Positive Sign
• Inferior GoodsNegative Sign
• Insights into the Economy
Copyright 2008 The McGraw-Hill Companies
Consumer and Producer Surplus
Consumer Surplus
O 18.3
Consumer
Surplus
Price (Per Bag)
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Equilibrium
Price = $8
P1
D
Key Terms
Q1
End Show
Quantity (Bags)
18-19
Copyright 2008 The McGraw-Hill Companies
Consumer and Producer Surplus
Producer Surplus
S
Price (Per Bag)
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Equilibrium
Price = $8
P1
Producer
Surplus
Key Terms
Q1
End Show
Quantity (Bags)
18-20
Copyright 2008 The McGraw-Hill Companies
Consumer and Producer Surplus
Efficiency Revisited
S
Consumer
Surplus
Price (Per Bag)
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
W 18.3
Equilibrium
Price = $8
P1
Producer
Surplus
D
Key Terms
Q1
End Show
Quantity (Bags)
18-21
Copyright 2008 The McGraw-Hill Companies
Consumer and Producer Surplus
Efficiency Revisited
Efficiency Losses (Deadweight Losses)
S
Efficiency
Losses
Price (Per Bag)
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
P1
D
Key Terms
Q2
End Show
Q1
Q3
Quantity (Bags)
18-22
Copyright 2008 The McGraw-Hill Companies
Elasticity and Pricing Power:
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
End Show
18-23
Why Different Consumers
Pay Different Prices
• All Buyers in a Highly
Competitive Market Pay the Same
Price Regardless of Their
Elasticities
• Difficulty in Applying Different
Prices
• Observe Differences in Group
Elasticities
– Business Travelers
– Leisure Travelers
– Discounting for Children
– Different Net Prices for College
Tuition
Copyright 2008 The McGraw-Hill Companies
Key Terms
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Key Terms
• price elasticity of
demand
• midpoint formula
• elastic demand
• inelastic demand
• unit elasticity
• perfectly inelastic
demand
• perfectly elastic
demand
• total revenue test
(TR)
• total-revenue test
End Show
18-24
Copyright 2008 The McGraw-Hill Companies
• price elasticity of
supply
• market period
• short run
• long run
• cross-elasticity of
demand
• income elasticity of
demand
• consumer surplus
• producer surplus
• efficiency losses
(deadweight losses)
Next Chapter Preview…
Price Elasticity
of Demand
Total Revenue
Test
Elasticity on a
Linear Demand
Curve
Price Elasticity
and the TotalRevenue Curve
Determinants of
Price Elasticity
of Demand
Price Elasticity
of Supply
Cross Elasticity
Income Elasticity
Consumer and
Producer
Surplus
Last Word
Consumer Behavior
And Utility
Maximization
Key Terms
End Show
18-25
Copyright 2008 The McGraw-Hill Companies