elasticity & total revenue
DESCRIPTION
Elasticity & Total Revenue. Chapter 5 completion…. Total Revenue & Profit. Total revenue ( TR ) = Price X Quantity Sold The total amount of money received by a business selling products. It is NOT profit!. Coffee Shop: Price coffee : $2/cup - PowerPoint PPT PresentationTRANSCRIPT
Elasticity & Total Revenue
Chapter 5 completion….
Total Revenue & Profit• Total revenue (TR) = Price X Quantity Sold
– The total amount of money received by a business selling products.
– It is NOT profit!
Coffee Shop: Price coffee: $2/cup Qty Sold: 500 per day
Total Revenue = $2 X 500 = $1,000
Profit = TR – All Expenses (costs)
Total Revenue
Demand
Quantity
Quantity
Price
0
Price
Price × Quantity = $400
( total revenue)
$4
100
Total Revenue changes as you move along the demand curve based on the elasticity of demand
All linear demand curves have both elastic& inelastic ranges
Points with high price & low quantity demand is elasticPoints with low price & high quantity demand is inelasticMid-point of line is unit elastic
0 2 64 108 12 14
2
1
4
3
5
6
$7
Elastic Range: Elasticity > 1
Inelastic Range: Elasticity < 1
Price
Quantity
Linear Demand Curve Elasticity
Unit Elastic at midpoint of line
% ∆ Qty D Ed = -------- .
% ∆ P
.
.
Total Revenue
. .
Total Revenue
Price ↑TR ↓
Price Increases & Total Revenue • Price ↑ => TR falls in elastic ranges• TR reaches maximum @ unit elastic• Price ↑ => TR rises in inelastic range
Elasticity Summary
• Elastic demand curves are flat • Inelastic demand curves are steep
• Slope is constant but elasticity is not! • Linear demand curves have both inelastic & elastic ranges
• Total Revenue = Price X Quantity– Falls when Prices ↑ on elastic goods– Rises when Prices ↑ on inelastic goods– Firms maximize total revenue by producing at unit elasticity
Total Revenue & Elasticity Worksheet