Demand Elasticity Work on the ½ sheet of problems at door. Have out HW & Test Corrections to be collected.

Warm Up Problems 1.P 1 $100P 2 $125 2.Q 1 10Q P 1 $64P 2 $32 4.P 1 $80P 2 $120 5.Q 1 50Q Q 1 16Q 2 20 Answer: +25% Answer: -20% Answer: -50% Answer: +50% Answer: +200% Answer: +25%

Warm Up Problems PointPriceQ.D. 1$126 2$89 PointPriceQ.D. 1$ $8090 Answer: Price decreases 33% Quantity increases 50% %ΔQD > % ΔP = Elastic E d = 1.5 Answer: Price increases 33% Quantity decreases 10% %ΔP > % ΔQD = Inelastic E d = 0.30

Elasticity and Total Revenue We have seen that OPEC increased its revenues in the 1970s by restricting supply and pushing up the market price of crude oil. We also argued that a similar strategy by OBEC would probably fail. Why?

Total Revenue We can now use the more formal definition of elasticity to make more precise our argument of why OPEC would succeed and OBEC would fail. In any market, P × Q is total revenue (TR) received by producers: TOTAL REVENUE = PRICE × QUANTITY TR = P × Q Because total revenue is the product of P and Q, whether TR rises or falls in response to a price increase depends on which is bigger (the percentage increase in price or the percentage decrease in quantity demanded).

Testing Total Revenue PQTR 1 $510 2 $ %∆ ↓50% ↑300% $50 $100 %ΔQD > %ΔP = Elastic; Decreasing Price will = Increase TR ×=

Testing Total Revenue PQTR 1 $ $45075 %∆ ↑125% ↓50% $30,000 $33,750 %ΔP > %ΔQD = Inelastic; Increasing Price will = Increase TR

Testing Total Revenue PQTR 1 $ $1524 %∆ ↑25% ↓33% $432 $360 %ΔQD > %ΔP = Elastic; Increasing Price will = Decrease TR

Testing Total Revenue PQTR 1 $ $2450 %∆ ↓33% ↑25% $1440 $1200 %ΔP > %ΔQD = Inelastic; Decreasing Price will = Decrease TR

Total Revenue Rules Effect of Price on Quantity Type of Elasticity Change in Total Revenue P × Q InelasticTR ↑ InelasticTR ↓ ElasticTR ↑ ElasticTR ↓