Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
7
C HAPTE R
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
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Elasticity of
Demand & Supply
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End
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7-1
Copyright McGraw-Hill/Irwin, 2005
PRICE ELASTICITY OF DEMAND
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
Slide
Think About It...
THE LAW OF DEMAND SAYS...
Consumers will buy more when
prices go down and less when
prices go up
HOW MUCH MORE OR LESS?
DOES IT MATTER?
to whom?
Next
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Price Elasticity Provides an Answer
End
Show
7-2
Copyright McGraw-Hill/Irwin, 2005
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
PRICE ELASTICITY OF DEMAND
Measures Responsiveness to
Price Changes
P
Determinants of Price
Elasticity of Demand
The percentage change in quantity
The percentage change in price
Price Elasticity of
Supply
Cross Elasticity of
Demand
.01
Income Elasticity of
Demand
Key Terms
Previous
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.02
P2
P1
Next
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Q2 Q1
End
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7-3
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D Elasticity is .5
Q
PRICE ELASTICITY OF DEMAND
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Commonly Expressed as…
P
Determinants of Price
Elasticity of Demand
The percentage change in quantity
The percentage change in price
Price Elasticity of
Supply
%Q d
% P
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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P2
P1
Next
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Q2 Q1
End
Show
7-4
Copyright McGraw-Hill/Irwin, 2005
D Elasticity is .5
Q
PRICE ELASTICITY OF DEMAND
The Price-Elasticity Coefficient and Formula
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Ed =
Price Elasticity of
Supply
Cross Elasticity of
Demand
Previous
Slide
Ed =
Next
Slide
Percentage change in price
of product X
Or equivalently…
Income Elasticity of
Demand
Key Terms
Percentage change in quantity
demanded of product X
Percentage change in quantity demanded of X
Original quantity demanded of X

Change in price of X
Original price of X
Elimination of the Minus Sign
End
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7-5
Copyright McGraw-Hill/Irwin, 2005
PRICE ELASTICITY OF DEMAND
Interpretations of Ed
Price Elasticity of
Demand
Elastic Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Ed =
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
.04
.02
=2
Inelastic Demand
Ed =
.01
.02
= .5
Unit Elasticity
Previous
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End
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7-6
Next
Slide
Ed =
Copyright McGraw-Hill/Irwin, 2005
.02
.02
=1
PRICE ELASTICITY OF DEMAND
Extreme Cases
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Perfectly Inelastic Demand
P
Determinants of Price
Elasticity of Demand
D1
Ed = 0
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
0
Q
Perfectly Elastic Demand
Key Terms
P
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End
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7-7
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Ed = 
0
Copyright McGraw-Hill/Irwin, 2005
D2
Q
PRICE ELASTICITY OF DEMAND
Refinement –
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
The Midpoint Formula
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
Slide
Ed =
Change in
quantity
Sum of
Quantities/2
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End
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7-8
Copyright McGraw-Hill/Irwin, 2005

Change in
price
Sum of
prices/2
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
P
When prices are
low,
So is total revenue
TR
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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D
Q
Next
Slide
End
Show
7-9
Copyright McGraw-Hill/Irwin, 2005
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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End
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7 - 10
D
Q
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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End
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7 - 11
D
Q
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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End
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7 - 12
D
Q
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Total Revenue Test
Income Elasticity of
Demand
Key Terms
Previous
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End
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7 - 13
D
Q
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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End
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Next
Slide
Inelastic
Demand
Copyright McGraw-Hill/Irwin, 2005
D
Q
Inelastic
Demand
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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End
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Elastic
Demand
Inelastic
Demand
Copyright McGraw-Hill/Irwin, 2005
D
Q
Elastic Inelastic
Demand Demand
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Previous
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End
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7 - 16
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Unit
Elastic
Elastic
Demand
Inelastic
Demand
Copyright McGraw-Hill/Irwin, 2005
D
Q
Elastic Inelastic
Demand Demand
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity is...
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Inelastic from 0 to 1
Typical of necessities one must have
Elastic from 1 to 
Typical of luxuries one wants
Unit elastic when exactly = 1
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Next
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Price change does not reduce total
revenue
Copyright McGraw-Hill/Irwin, 2005
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
DETERMINANTS OF PRICE
ELASTICITY OF DEMAND
•Substitutability
•Proportion of Income
•Luxuries versus Necessities
•Time
Applications...
Key Terms
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End
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Next
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Large Crop Yields
Excise Taxes
Decriminalization of Illegal Drugs
Minimum Wage
Copyright McGraw-Hill/Irwin, 2005
PRICE ELASTICITY OF SUPPLY
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Es=
Percentage change in quantity
supplied of good X
Percentage change in
the price of good X
Key Terms
Previous
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End
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Next
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Now, compare the immediate
market period, the short-run,
and long run.
Copyright McGraw-Hill/Irwin, 2005
PRICE ELASTICITY OF SUPPLY
Immediate Market period
Price Elasticity of
Demand
P
Sm
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
An increase in
demand without
enough time to
change supply
causes…
Po
Key Terms
Previous
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End
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D1
Next
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Qo
Copyright McGraw-Hill/Irwin, 2005
Q
PRICE ELASTICITY OF SUPPLY
Immediate Market period
Price Elasticity of
Demand
P
Sm
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Pm
An increase in
demand without
enough time to
change supply
causes… an
increase in price
Po
Key Terms
D2
Previous
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End
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D1
Next
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Qo
Copyright McGraw-Hill/Irwin, 2005
Q
PRICE ELASTICITY OF SUPPLY
Short Run
Price Elasticity of
Demand
P
Ss
An increase in
demand with
less intensity
supply use
causes...
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Po
Key Terms
Previous
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End
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D1
Next
Slide
Qo
Copyright McGraw-Hill/Irwin, 2005
Q
PRICE ELASTICITY OF SUPPLY
Short Run
Price Elasticity of
Demand
P
Ss
An increase in
demand with
less intensity
supply use
causes...a lower
increase in price
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Ps
Income Elasticity of
Demand
Po
Key Terms
D2
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End
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D1
Next
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QoQs
Copyright McGraw-Hill/Irwin, 2005
Q
PRICE ELASTICITY OF SUPPLY
Long Run
Price Elasticity of
Demand
An increase in
demand in the
long run allows
greater change
causing...
SL
P
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Po
Key Terms
Previous
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End
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D1
Next
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Qo
Copyright McGraw-Hill/Irwin, 2005
Q
PRICE ELASTICITY OF SUPPLY
Long Run
Price Elasticity of
Demand
An increase in
demand in the
long run allows
greater change
causing...
SL
P
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
PL
Po
Even more elastic
response - less
price increase
Key Terms
D2
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End
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D1
Next
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Qo
Copyright McGraw-Hill/Irwin, 2005
QL
Q
PRICE ELASTICITY OF SUPPLY
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Applications of Price
Elasticity of Supply
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
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End
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Antiques and
Reproductions
Volatile Gold Prices
Copyright McGraw-Hill/Irwin, 2005
CROSS ELASTICITY OF DEMAND
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
Exy =
Percentage change in quantity
demanded of good X
Percentage change in
the price of good y
Positive Sign
Goods are Substitutes
Negative Sign
Goods are Complementary
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End
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Next
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Zero or Near-Zero Value
Goods are Independent
Copyright McGraw-Hill/Irwin, 2005
INCOME ELASTICITY OF DEMAND
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
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End
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Ei =
Percentage change in quantity
demanded
Percentage change in
income
Positive Sign
Goods are Normal or
Superior
Negative Sign
Goods are Inferior
Copyright McGraw-Hill/Irwin, 2005
price elasticity of demand
elastic demand
inelastic demand
unit elasticity
perfectly inelastic demand
perfectly elastic demand
total revenue (TR)
Copyright McGraw-Hill/Irwin, 2005
total-revenue test
price elasticity of supply
market period
short run
long run
cross elasticity of demand
income elasticity of demand
BACK
END
Price Elasticity of
Demand
Next:
Chapter 8
Price Elasticity and
Total Revenue
Determinants of Price
Elasticity of Demand
Price Elasticity of
Supply
Cross Elasticity of
Demand
Income Elasticity of
Demand
Key Terms
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End
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Consumer Behavior
and
Utility Maximization
Next
Slide
Copyright McGraw-Hill/Irwin, 2005