1. Copyright 2008 The McGraw-Hill Companies 18-1 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Extensions of Demand and Supply Analysis

2. Copyright 2008 The McGraw-Hill Companies 18-2 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Chapter Objectives 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

3. Copyright 2008 The McGraw-Hill Companies 18-3 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Demand Measuring Responsiveness to Price Changes Relatively Elastic or Inelastic Price-Elasticity Coefficient and Formula Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X E d = O 18.1

4. Copyright 2008 The McGraw-Hill Companies 18-4 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Demand Formula Restated Change in Quantity Demanded of X Original Price of X E d = Change in Price of X Original Quantity Demanded of X ÷ Using Averages Midpoint Formula Change in Quantity E d = Sum of Quantities/2 ÷ Change in Price Sum of Prices/2 W 18.1

5. Copyright 2008 The McGraw-Hill Companies 18-5 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Demand Why Use Percentages? Elimination of the Minus Sign Interpretations of E d Elastic Demand Inelastic Demand Unit Elasticity E d =.04.02 = 2E d =.01.02 =.5E d =.02 = 1

6. Copyright 2008 The McGraw-Hill Companies 18-6 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Demand Extreme Cases Perfectly Inelastic Demand Perfectly Elastic Demand 0 P Q P 0 Q D1D1 D2D2 Perfectly Inelastic Demand (E d = 0) Perfectly Elastic Demand (E d = )

7. Copyright 2008 The McGraw-Hill Companies 18-7 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 $3 2 1 0 10 20 30 40 Q P The Total Revenue Test Total Revenue (TR) TR = P x Q Elastic Demand a b D1D1 W 18.2

8. Copyright 2008 The McGraw-Hill Companies 18-8 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 $4 3 2 1 0 10 20 Q P The Total Revenue Test Total Revenue (TR) TR = P x Q Inelastic Demand c d D2D2 W 18.2

9. Copyright 2008 The McGraw-Hill Companies 18-9 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 $3 2 1 0 10 20 30 Q P The Total Revenue Test Total Revenue (TR) TR = P x Q Unit-Elastic e f D3D3 W 18.2

10. Copyright 2008 The McGraw-Hill Companies 18-10 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Elasticity on a Linear Demand Curve 1234567812345678 8765432187654321 5.00 2.60 1.57 1.00 0.64 0.38 0.20 $8,000 14,000 18,000 20,000 18,000 14,000 8,000 Elastic Unit Elastic Inelastic (1) Total Quantity of Tickets Demanded Per Week, Thousands (2) Price Per Ticket (3) Elasticity Coefficient (E d ) (4) Total Revenue (1) X (2) (5) Total-Revenue Test ] ] ] ] ] ] ] ] ] ] ] ] ] ] Price Elasticity of Demand for Movie Tickets as Measured by the Elasticity Coefficient and the Total-Revenue Test Graphically… G 18.1

11. Copyright 2008 The McGraw-Hill Companies 18-11 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity and the Total-Revenue Curve 012345678 012345678 Quantity Demanded Price Total Revenue (Thousands of Dollars) $20 18 16 14 12 10 8 6 4 2 $8 7 6 5 4 3 2 1 a b c d e f g h Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1 Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1 D TR

12. Copyright 2008 The McGraw-Hill Companies 18-12 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Determinants of Price Elasticity of Demand Substitutability Proportion of Income Luxuries versus Necessities Time Applications: –Large Crop Yields –Excise Taxes –Decriminalization of Illegal Drugs

13. Copyright 2008 The McGraw-Hill Companies 18-13 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 P Q Price Elasticity of Supply O 18.2 Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X E s = Unit Elastic Supply E s = 1 Market Period: Not Enough Time to Shift Resources D1D1 D2D2 SmSm Q0Q0 PmPm P0P0 Greatest Price Impact

14. Copyright 2008 The McGraw-Hill Companies 18-14 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Supply O 18.2 Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X E s = Inelastic Supply E s < 1 Short Run: Resources Not Easily Shifted to Alternative Uses P Q D1D1 D2D2 SsSs Q0Q0 PsPs P0P0 QsQs Lower Price Impact

15. Copyright 2008 The McGraw-Hill Companies 18-15 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Supply O 18.2 Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X E s = Elastic Supply E s > 1 Long Run: Resources Easily Shifted to Alternative Uses P Q D1D1 D2D2 SlSl Q0Q0 PlPl P0P0 QlQl Least Price Impact

16. Copyright 2008 The McGraw-Hill Companies 18-16 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Price Elasticity of Supply Applications –Antiques and Reproductions –Volatile Gold Prices

17. Copyright 2008 The McGraw-Hill Companies 18-17 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Cross Elasticity of Demand Substitute Goods – Positive Sign Complementary Goods- Negative Sign Independent Goods – Zero or Near-Zero Value Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product Y E xy =

18. Copyright 2008 The McGraw-Hill Companies 18-18 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Income Elasticity of Demand Normal Goods – Positive Sign Inferior Goods- Negative Sign Insights into the Economy Percentage Change in Quantity Demanded Percentage Change in Income E i =

19. Copyright 2008 The McGraw-Hill Companies 18-19 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Consumer and Producer Surplus Consumer Surplus D Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Equilibrium Price = $8 O 18.3

20. Copyright 2008 The McGraw-Hill Companies 18-20 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Consumer and Producer Surplus Producer Surplus S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Producer Surplus Equilibrium Price = $8

21. Copyright 2008 The McGraw-Hill Companies 18-21 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Consumer and Producer Surplus Efficiency Revisited D S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Producer Surplus Equilibrium Price = $8 W 18.3

22. Copyright 2008 The McGraw-Hill Companies 18-22 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Consumer and Producer Surplus Efficiency Revisited D S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Efficiency Losses Q2Q2 Q3Q3 Efficiency Losses (Deadweight Losses)

23. Copyright 2008 The McGraw-Hill Companies 18-23 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Elasticity and Pricing Power: Last Word 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

24. Copyright 2008 The McGraw-Hill Companies 18-24 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Key Terms price elasticity of demandprice elasticity of demand midpoint formula elastic demand inelastic demand unit elasticity perfectly inelastic demandperfectly inelastic demand perfectly elastic demandperfectly elastic demand total revenue test (TR)total revenue test (TR) total-revenue test price elasticity of supplyprice elasticity of supply market period short run long run cross-elasticity of demandcross-elasticity of demand income elasticity of demandincome elasticity of demand consumer surplus producer surplus efficiency losses (deadweight losses)efficiency losses (deadweight losses)

25. Copyright 2008 The McGraw-Hill Companies 18-25 Price Elasticity of Demand Total Revenue Test Elasticity on a Linear Demand Curve Price Elasticity and the Total- Revenue 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 Next Chapter Preview… Consumer Behavior And Utility Maximization