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 Price 0 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 elastic Points with low price & high quantity demand is inelastic Mid-point of line is unit elastic

$7 Elastic Range: Elasticity > 1 Inelastic Range: Elasticity < 1 Price Quantity Linear Demand Curve Elasticity Unit Elastic at midpoint of line % ∆ Qty D E d = % ∆ P

.... Total Revenue Price ↑ TR ↑.. Total Revenue Price ↑ TR ↓ Price Increases & Total Revenue Price ↑ => TR falls in elastic ranges TR reaches 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