Elasticity of Demand and Supply: Understanding Price-Quantity Relationships, Slides of Introduction to Macroeconomics

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Chapter 5

Elasticity of

Demand and Supply

These slides supplement the textbook, but should not replace reading the textbook

What is total revenue?

Price multiplied by the quantity sold at that price

P X Q

 more money is made per unit

 fewer units are sold

When price

increases what two

things happen?

What is price elasticity of demand?

A measure of the responsiveness of quantity demanded to a price change

How do I measure

a percent change

in quantity?

You take the difference

between the two

quantities and divide

by the original number

For example, if there

is an increase from 3

units to 5, what is the

percentage increase?

The percent increase is 67%

So …

2/3 = 67%

If there is a decrease

from 5 units to 3, what is

the percent decrease?

2/5 = 40%

If demand is elastic - revenue goes down

If demand is inelastic - revenue goes up

If NRCC raises

tuition, what happens

to total revenue?

 more money is made per unit

 fewer units are sold

When price

increases what two

things happen?

When price increases and

there is a net loss in

revenue, the demand

curve is price elastic, > 1

More money is lost because of the fewer units sold then the money gained because of the higher price

When price

increases demand

is elastic when …?

More money is gained because of the higher price then the money lost because of the fewer units sold

When price

increases demand is

inelastic when …?

Elastic demand curves are more horizontal than inelastic demand curves

What do elastic demand

curves look like?