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By the end of this section, you will be able to:

  • Analyze how price elasticities impact revenue
  • Evaluate how elasticity can cause shifts in demand and supply
  • Predict how the long-run and short-run impacts of elasticity affect equilibrium
  • Explain how the elasticity of demand and supply determine the incidence of a tax on buyers and sellers

Studying elasticities is useful for a number of reasons, pricing being most important. Let’s explore how elasticity relates to revenue and pricing, both in the long run and short run. But first, let’s look at the elasticities of some common goods and services.

[link] shows a selection of demand elasticities for different goods and services drawn from a variety of different studies by economists, listed in order of increasing elasticity.

Some Selected Elasticities of Demand
Goods and Services Elasticity of Price
Housing 0.12
Transatlantic air travel (economy class) 0.12
Rail transit (rush hour) 0.15
Electricity 0.20
Taxi cabs 0.22
Gasoline 0.35
Transatlantic air travel (first class) 0.40
Wine 0.55
Beef 0.59
Transatlantic air travel (business class) 0.62
Kitchen and household appliances 0.63
Cable TV (basic rural) 0.69
Chicken 0.64
Soft drinks 0.70
Beer 0.80
New vehicle 0.87
Rail transit (off-peak) 1.00
Computer 1.44
Cable TV (basic urban) 1.51
Cable TV (premium) 1.77
Restaurant meals 2.27

Note that necessities such as housing and electricity are inelastic, while items that are not necessities such as restaurant meals are more price-sensitive. If the price of the restaurant meal increases by 10%, the quantity demanded will decrease by 22.7%. A 10% increase in the price of housing will cause a slight decrease of 1.2% in the quantity of housing demanded.

Read this article for an example of price elasticity that may have affected you.

Does raising price bring in more revenue?

Imagine that a band on tour is playing in an indoor arena with 15,000 seats. To keep this example simple, assume that the band keeps all the money from ticket sales. Assume further that the band pays the costs for its appearance, but that these costs, like travel, setting up the stage, and so on, are the same regardless of how many people are in the audience. Finally, assume that all the tickets have the same price. (The same insights apply if ticket prices are more expensive for some seats than for others, but the calculations become more complicated.) The band knows that it faces a downward-sloping demand curve; that is, if the band raises the price of tickets, it will sell fewer tickets. How should the band set the price for tickets to bring in the most total revenue, which in this example, because costs are fixed, will also mean the highest profits for the band? Should the band sell more tickets at a lower price or fewer tickets at a higher price?

The key concept in thinking about collecting the most revenue is the price elasticity of demand. Total revenue is price times the quantity of tickets sold. Imagine that the band starts off thinking about a certain price, which will result in the sale of a certain quantity of tickets. The three possibilities are laid out in [link] . If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue. However, if demand is inelastic at that original quantity level, then the band should raise the price of tickets, because a certain percentage increase in price will result in a smaller percentage decrease in the quantity sold—and total revenue will rise. If demand has a unitary elasticity at that quantity, then a moderate percentage change in the price will be offset by an equal percentage change in quantity—so the band will earn the same revenue whether it (moderately) increases or decreases the price of tickets.

Questions & Answers

how is the graph works?I don't fully understand
Rezat Reply
multiple choice question
Aster Reply
explain perfect market
Lindiwe Reply
In economics, a perfect market refers to a theoretical construct where all participants have perfect information, goods are homogenous, there are no barriers to entry or exit, and prices are determined solely by supply and demand. It's an idealized model used for analysis,
Ezea
What is ceteris paribus?
Shukri Reply
other things being equal
AI-Robot
When MP₁ becomes negative, TP start to decline. Extuples Suppose that the short-run production function of certain cut-flower firm is given by: Q=4KL-0.6K2 - 0.112 • Where is quantity of cut flower produced, I is labour input and K is fixed capital input (K-5). Determine the average product of lab
Kelo
Extuples Suppose that the short-run production function of certain cut-flower firm is given by: Q=4KL-0.6K2 - 0.112 • Where is quantity of cut flower produced, I is labour input and K is fixed capital input (K-5). Determine the average product of labour (APL) and marginal product of labour (MPL)
Kelo
yes,thank you
Shukri
Can I ask you other question?
Shukri
what is monopoly mean?
Habtamu Reply
What is different between quantity demand and demand?
Shukri Reply
Quantity demanded refers to the specific amount of a good or service that consumers are willing and able to purchase at a give price and within a specific time period. Demand, on the other hand, is a broader concept that encompasses the entire relationship between price and quantity demanded
Ezea
ok
Shukri
how do you save a country economic situation when it's falling apart
Lilia Reply
what is the difference between economic growth and development
Fiker Reply
Economic growth as an increase in the production and consumption of goods and services within an economy.but Economic development as a broader concept that encompasses not only economic growth but also social & human well being.
Shukri
production function means
Jabir
What do you think is more important to focus on when considering inequality ?
Abdisa Reply
any question about economics?
Awais Reply
sir...I just want to ask one question... Define the term contract curve? if you are free please help me to find this answer 🙏
Asui
it is a curve that we get after connecting the pareto optimal combinations of two consumers after their mutually beneficial trade offs
Awais
thank you so much 👍 sir
Asui
In economics, the contract curve refers to the set of points in an Edgeworth box diagram where both parties involved in a trade cannot be made better off without making one of them worse off. It represents the Pareto efficient allocations of goods between two individuals or entities, where neither p
Cornelius
In economics, the contract curve refers to the set of points in an Edgeworth box diagram where both parties involved in a trade cannot be made better off without making one of them worse off. It represents the Pareto efficient allocations of goods between two individuals or entities,
Cornelius
Suppose a consumer consuming two commodities X and Y has The following utility function u=X0.4 Y0.6. If the price of the X and Y are 2 and 3 respectively and income Constraint is birr 50. A,Calculate quantities of x and y which maximize utility. B,Calculate value of Lagrange multiplier. C,Calculate quantities of X and Y consumed with a given price. D,alculate optimum level of output .
Feyisa Reply
Answer
Feyisa
c
Jabir
the market for lemon has 10 potential consumers, each having an individual demand curve p=101-10Qi, where p is price in dollar's per cup and Qi is the number of cups demanded per week by the i th consumer.Find the market demand curve using algebra. Draw an individual demand curve and the market dema
Gsbwnw Reply
suppose the production function is given by ( L, K)=L¼K¾.assuming capital is fixed find APL and MPL. consider the following short run production function:Q=6L²-0.4L³ a) find the value of L that maximizes output b)find the value of L that maximizes marginal product
Abdureman
types of unemployment
Yomi Reply
What is the difference between perfect competition and monopolistic competition?
Mohammed
what are y=b+mx
Deva Reply
The equation y = b + mx represents a linear equation in slope-intercept form, where y is the dependent variable, x is the independent variable, m is the slope, and b is the y-intercept. The slope-intercept form of a linear equation is commonly written as y = mx + b, where m represents the slope of
Steven
Consider the following Total Revenue (TR) and Total Cost (TC) functions for a firm operating in a perfect competition market: TR = 6Q and TC = Q3 – 2Q2 + 50Q + 25 Determine the profit maximizing or loss minimizing equilibrium level of output. Compute the level of
Abdulwab Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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