Demand Elasticity

1. Demand Elasticity Work on the ½ sheet of problems at door. Have out HW & Test Corrections to be collected.

2. Warm Up Problems • P1 $100 P2 $125 • Q1 10 Q2 8 • P1 $64 P2 $32 • P1 $80 P2 $120 • Q1 50 Q2 150 • Q1 16 Q2 20 Answer: +25% Answer: -20% Answer: -50% Answer: +50% Answer: +200% Answer: +25%

3. Warm Up Problems Answer: Price decreases 33% Quantity increases 50% %ΔQD > %ΔP = Elastic Ed = 1.5 Answer: Price increases 33% Quantity decreases 10% %ΔP > %ΔQD = Inelastic Ed = 0.30

4. Elasticity and Total Revenue • We have seen that OPEC increased its revenues in the 1970s by restricting supply and pushing up the market price of crude oil. We also argued that a similar strategy by OBEC would probably fail. Why?

5. Total Revenue • We can now use the more formal definition of elasticity to make more precise our argument of why OPEC would succeed and OBEC would fail. In any market, P × Q is total revenue (TR) received by producers: • TOTAL REVENUE = PRICE ×QUANTITY • TR = P ×Q • Because total revenue is the product of P and Q, whether TR rises or falls in response to a price increase depends on which is bigger (the percentage increase in price or the percentage decrease in quantity demanded).

6. Testing Total Revenue × = $50 $100 ↓50% ↑300% %ΔQD > %ΔP = Elastic; Decreasing Price will = Increase TR

7. Testing Total Revenue $30,000 $33,750 ↑125% ↓50% %ΔP > %ΔQD = Inelastic; Increasing Price will = Increase TR

8. Testing Total Revenue $432 $360 ↑25% ↓33% %ΔQD > %ΔP = Elastic; Increasing Price will = Decrease TR

9. Testing Total Revenue $1440 $1200 ↓33% ↑25% %ΔP > %ΔQD = Inelastic; Decreasing Price will = Decrease TR

10. Let's Graph Demand and Total Revenue!

11. Total Revenue Rules Inelastic TR ↑ Inelastic TR ↓ Elastic TR ↑ Elastic TR ↓