 Total revenue (TR)  TR = P x Q  TR and E d are related  If TR changes in the opposite direction from price, demand is elastic  If TR changes in the same direction from price, demand is inelastic  If TR does not change when price changes, demand is unit elastic © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 1

$ Q P Loss Gain a b D1D1 Lower price and elastic demand Blue gain exceeds yellow loss © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 2

$ Q P Loss Gain c d D2D2 Lower price and inelastic demand Yellow loss exceeds blue gain © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 3

$ Q P Loss Gain e f D3D3 Lower price and unit elastic demand Blue gain equals yellow loss © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 4

(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 1$8$8, ,000Elastic ,000Elastic ,000Elastic ,000Unit Elastic ,000Inelastic ,000Inelastic ,000Inelastic © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 5

Quantity Demanded Price Total Revenue (Thousands of Dollars) $ $ a b c d e f g h Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1 D TR © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 6

 For all straight-line and most other demand curves  Demand is more elastic toward the upper left  Demand is less elastic toward the lower right © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 7

Absolute value of elasticity coefficient Impact on total revenue of a Demand isDescriptionPrice increasePrice decrease Greater than 1 (E d > 1) Elastic or relatively elastic Quantity demanded changes by a larger percentage than does price Total revenue decreases Total revenue increases Equal to 1 (E d = 1) Unit or unitary elastic Quantity demanded changes by the same percentage as does price Total revenue is unchanged Less than 1 (E d < 1) Inelastic or relatively inelastic Quantity demanded changes by a smaller percentage than does price Total revenue increases Total revenue decreases © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 8

 Substitutability  Proportion of Income  Luxuries versus Necessities  Time © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 9

Product or service Coefficient of price elasticity of demand, E d Product or service Coefficient of price elasticity of demand, E d Newspapers0.10Household appliances0.63 Electricity (household)0.13Movies0.87 Bread0.15Beer0.90 Major league baseball tickets 0.23Shoes0.91 Telephone service0.26Motor vehicles1.14 Sugar0.30Beef1.27 Eggs 0.32 China, glassware, tableware 1.54 Legal services0.37Residential land1.60 Automobile repair0.40Restaurant meals2.27 Clothing0.49Lamb and mutton2.65 Gasoline0.60Fresh peas2.83 Milk0.63 © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 10

 Large Crop Yields  Sales Taxes  Decriminalization of Illegal Drugs © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO2 11