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19 Demand Elasticity Affects Revenue
 Index

I. Introduction

II. Price Elasticity of Demand 1 video 

III. Graphic Interpreting of Elasticity 

IV. The Total Revenue Test  3 videos 

V. Demand Elasticity Characteristics

VI. Income Elasticity of Demand  1 video

 VII. Cross Elasticity of Demand 1 video 

VIII. Applications

IX. Price Elasticity of Supply

Appendix Ed for College Graduates

Chapter 20 Consumer Behavior Theory

Lecture Notes

1-page printable lecture notes

I Introduction
    A. Math Review and Quiz plus Calculus Review for economics from Dr. R. L. Reynolds of Boise St. U.
    B. Some may want to review supply and demand principles explained in Chapter 4.
         Elasticity of demand measures the responsiveness of quantity demanded to changes in price,
         income, and price of
 II. Price elasticity of demand
    A. Price elasticity of demand measures the effect of price changes on  quantity demanded. 
    B. Sometimes a price increase causes quantity bought to decrease significantly, other times not much.
        1.High airfares for a luxury vacation may cause you to vacation locally.
        2.High coffee prices when it is a thought of as a necessity may not change quantity demanded much.
    C. The more quantity changes because of a price change, the more elastic is demand.
         1. Relative change will be measured as a one dollar change at higher prices is not as significant as at lower prices.
         2. Percent change is an easy way to measure relative change.
    D. Elasticity of demand is important because it predicts what may happen to total revenue received when a company
         changes the price of a product.
    E. Elasticity from Samuel L. Baker, Ph.D. of  U. of South Carolina provides problems to help with the understanding of elasticity.
    F. Elasticity can be measured quantitatively.
        1. The Coefficient of elasticity of demand for product x measures its price elasticity. 
        2. Delta, , means change.

        


   G. A demand schedule has more than one elasticity of demand.
   H. Using one point is called point elasticity while two points is called arc elasticity.
    I.  Calculating arc linear price elasticity using a formula. 

  

 

Unit 1 Review Elasticity measures the effect price changes on quantities purchased

III. Graphic Interpreting of Elasticity
    A. At the Extremes

Elasticity measures reaction to price. Elastic is flat, quantity changes more, Inelastic is steep, quantity changes less.

 
B. Total Revenue derived from a Linear Demand Curve 

 
IV. The Total Revenue Test
     A. When demand is elastic, price and total revenue move in the opposite direction.
     B. When demand is inelastic, price and total revenue move in the same direction.
     C. Total Revenue Test Video has a  graphic explanation.
     D. Welker Video Elasticity &Total Revenue

Elasticity of Demand and Total Revenue

Elasticity

When Price Increases

Total Revenue

ED   >1

Somewhat Elastic Quantity Changing a Lot so a lot of revenue could be lost. 

Decreases

ED = 1

Unitary Elasticity Quantity/Price Changing Same %

No Change

ED <1

Somewhat Inelastic Quantity Changed Little so a lot of revenue could be gained.

Increased

Unit 5 R With elastic demand p and TR move in opposite directions, Inelastic the same direction

We need to understand cost  production to understand making a profit.
V. Determinates of Demand Elasticity  6 minute video
Product Characteristics Elastic Demand Inelastic Demand
Number of substitutes Many Few or none
% of purchaser's budget High Low
Type of good Luxury Necessity, Emergency
Desire No hurry Required quickly
Examples Steak, Vacations Salt, Bread
 Unit 6 Review Substitutes, price, necessity or luxury, budgets position determine elasticity

VI. Income Elasticity of Demand
       is the % change in quantity demanded divided by the % change in income. 

        A. Income elasticity is positive for normal (superior) goods such as steak
             and vacations - more is purchased as income increases. 
        B. Income elasticity is negative for inferior goods such as bread and
             hamburger-less is purchased as income increases.
        C. In times of recession, income elasticity determines loss in revenue by
             producing firms. 
        D. Selected income elasticity's Wiki
        E. Income Elasticity of Demand
            1. Income Elasticity of Demand from tutor2u for more information.
            2. Example


 

 
VII . Cross elasticity of demand 
      is the % change in quantity demanded divided by the % change in the price of a substitute or complement. 
       A. Cross elasticity is positive for goods that are substitutes (price of hot dogs up, quantity of hamburger sold up).
       B. It is negative for goods that are complements (price of hot dogs up, quantity of hot dog rolls sold down).
       C Near zero for independent goods (peanuts and grapefruit)
       C. Cross Price Elasticity of Demand from tutor2u
       D. Income and Cross Elasticity Video from ACDC Econ
       E. Low cross-price elasticity of demand means there's no incentive to vote for more California housing 2/19/19
       F. Virtual Economy from Buz\ed has an elasticity calculator.       Please Share   
 
VIII. Applications
        A. Various research methods are used to calculate price
            elasticity:
           1. Test marketing
           2. Analysis of historical sales data
        B. Example 1
            1. Slave Redemption and Elasticity 1
             2. Slave Redemption and Elasticity 2
        C. Applied Elasticity of Demand 4 min video
        D. Selected income elasticity's
            1.View a table containing elasticity of demand approximations
            s 2. Income elasticity's are notably stable over time and across countries.
            3. Could Price  Elasticith be Increasing? in our more competitive world

        
    

 

 

      E. Price Elasticity and Government Actions
          1. High farm yields for crops with an inelastic demand cause farmers to lose
              money as people don't eat a lot more so we have a federal farm program.
          2. Excises taxes increase price so the governments puts them on
              inelastic goods like tobacco, alcohol, and jewelry.
              a. Drugs could be next and profit will be determined by price
                   elasticity of demand for drugs (How Inelastic is it?), law 
                   enforcement savings, and the cost of helping new addicts?
              b. Econ Concepts in 60 Seconds Analyzing Excise Tax Practice
              c. Why It's Obvious We are losing the war against drugs
              d. Elasticity and the Price of Gasoline
              e. Elasticity of Demand for Higher Education
              f. Price Elasticity of Demand at a Private University

 

  
   F. Tax Incidence Effects

PEDs, in combination with price elasticity of supply (PES), can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is perfectly inelastic, by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant. Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety. In the opposite case, when demand is perfectly elastic, by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero. As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.[38]

More generally, then, the higher the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more inelastic the demand compared to PES, the heavier the burden on consumers. The general principle is that the party (i.e., consumers or producers) that has fewer opportunities to avoid the tax.

In practice, demand is likely to be only relatively elastic or relatively inelastic, that is, somewhere between the extreme cases of perfect elasticity or inelasticity.  ACDC Videos  Tax Incidence  Taxes on Producers     Excise Tax Practice

 
 

IX. Price elasticity of supply  is the % change in quantity supplied divided by the % change in price. 

                                         
       A. It is a function of how factor costs change as more is produced and the passage of time. 
       B. If costs (factor prices such as wages and rent) change little as more is offered for sale at higher selling prices
            then profit potential is high and supply will be elastic. 
       C. Supply elasticity also increases with time as companies have more time to adjust to higher costs. 
           1. Unusually high demand for tomato's or the Chrysler PT Cruiser take time to produce and supply is inelastic.
           2. Gateway may be able to increase the number of a new popular model computer quickly and supply is more elastic.
       D. Gold production is costly and takes time so price is volatile because of frequent demand changes.
       E. Selected supply elasticity's
       F. Visit Price elasticity of supply from tutor2u for more information
 

Appendix

Elasticity of Demand for College Graduates
    A. Dramatic Increase In Quantity of People Buying a Degree Push Up Price

     B. Price is up much more than even health care!
         1. Cost of living tripled
         2. Health care up six times
         3. College tuition/fees almost ten times

    C. How colleges increase demand elasticity
        1. The include graduate degrees in with just a bachelors' degree
            when reporting income figure for bachelors'' all students with a
            knowing that people with just a bachelor's degree earn much less
            than those that also have advanced degrees.
        2. In the bachelors degree only group those prejudice for
            college use average earnings rather than median earnings
            as averages are skewed higher by high by STEM majors.
            See Effect of Education on Income
        3. Grade inflation is used to convince students and parents
            their money is being well spent! Colleges teachers are
            increasing their own economic well-being by using high
            grades to make demand inelastic. Were college catalogs
            changed to say average is B+ to A-? Grade Inflation as
            A's and B's Increased from 40% to about 85% Making
            Product Look Like a Better Investment.

      4. To maximize revenue private colleges
              increase tuition much more than needed and use the extra tuition
              paid by people they don't want to provide grants to people they
              do want. In affect, the poorer students are financing the better
              students who will end up getting one of the few good jobs
              available to college grads. FUNNY MONEY GRANTS are
              different than grants backed by cash provided to the college
              by alumni and friends.
              See Why College Tuition is Not Up Rapidly

       5. Colleges hire consultants with complex computer
                programs to maximize the cash received
                from students receiving FUNNY MONEY
                GRANTS. Students given a FUNNY MONEY
                sports grant to play college ball can get their
                entire family to come up with more cash often
                through borrowing!

         6. Demand id Inelastic

 

Advanced Degrees Graduates  
Earn Much More

Stem Graduates Make Much More

Bachelor's Only Earn Little Can't Pay for Loans

7. Result US Students Pay Lots

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