ELASTICITY AND REVENUE

DEFINITION

Measures how sensitive quantity demanded or supplied is to a change in price.

INELASTIC DEMAND

A type of demand where quantity demanded changes by a smaller percentage than the percentage change in price, indicating that consumers are less responsive to price changes.

There are also less substitutes for this good or service, making it less elastic. (ex. gasoline)

= % change in quantity demanded/ % of change in price

The coefficient of inelasticity is <1 (less than 1)

ELASTIC DEMAND

A type of demand where quantity demanded changes by a larger percentage than the percentage change in price, indicating that consumers are more responsive to price changes.

This type of demand typically has many substitutes available, influencing consumer choices greatly.

= % of change in quantity/% of change in price

The coefficient of elasticity is >1 (greater than 1).

UNIT ELASTIC DEMAND

A type of demand where the percentage change in quantity demanded is exactly equal to the percentage change in price, resulting in a coefficient of elasticity equal to 1.

Has a coefficient of elasticity equal to 1.

=% change in quantity/% of price = 1

This indicates that total revenue remains constant when the price changes.

PERFECTLY INELASTIC

A type of demand where quantity demanded remains constant regardless of price changes

Has a coefficient of elasticity equal to 0.

=% change in quantity/% of price = 0

This implies that consumers will purchase the same amount no matter the price.

(slap)

PERFECTLY ELASTIC

A type of demand where quantity demanded changes infinitely with any change in price. It has a coefficient of elasticity equal to infinity, indicating that consumers will only buy at a specific price.

Has a coefficient of elasticity equal to infinity.

=% change in quantity/% of price = infinity

ALL COMBINED

Perfectly inelastic: VERTICAL = 0

Relatively inelastic: SLIGHTLY SLANTED = <1

Unit elastic: DIAGONAL = 1

Relatively elastic: SLANTED = >1

Perfectly elastic: HORIZONTAL = ∞ (infinity)

TOTAL REVENUE TEST: INELASTIC

When the price goes up, the total revenue goes up OR when the price goes down, the total revenue goes down.

TOTAL REVENUE TEST: ELASTIC

When the price goes up, the total revenue goes down AND when the price goes down, the total revenue goes up.