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ELASTICITIES (CONTINUED………….):Total revenue and Elasticity

<< ELASTICITIES:Price Elasticity of Demand, Point Elasticity, Arc Elasticity
ELASTICITIES (CONTINUED………….):Short Run and Long Run, Incidence of Taxation >>
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Introduction to Economics ­ECO401
VU
Lesson 3.2
ELASTICITIES (CONTINUED.............)
Elastic and Inelastic Demand:
Slope and elasticity of demand have an inverse relationship. When slope is high elasticity of
demand is low and vice versa.
When the slope of a demand curve is infinity, elasticity is zero (perfectly inelastic demand);
and when the slope of a demand curve is zero, elasticity is infinite (perfectly elastic demand).
Unit elasticity means that a 1% change in price will result in an exact 1% change in quantity
demanded. Thus elasticity will be equal to one. A unit elastic demand curve plots as a
rectangular hyperbola. Note that a straight line demand curve cannot have unit elasticity as the
value of elasticity changes along the straight line demand curve.
Total revenue and Elasticity:
Total revenue (TR) = Price x Quantity; when the demand curve is inelastic, TR increases as
the price goes up, and vice versa; when the demand curve is elastic, TR falls as the price goes
up, and vice versa.
Determinants of price elasticity of demand:
1. Number of close substitutes within the market - The more (and closer) substitutes
available in the market the more elastic demand will be in response to a change in price. In
this case, the substitution effect will be quite strong.
2. Percentage of income spent on a good - It may be the case that the smaller the
proportion of income spent taken up with purchasing the good or service the more inelastic
demand will be.
3. Time period under consideration - Demand tends to be more elastic in the long run rather
than in the short run. For example, after the two world oil price shocks of the 1970s - the
"response" to higher oil prices was modest in the immediate period after price increases, but
as time passed, people found ways to consume less petroleum and other oil products. This
included measures to get better mileage from their cars; higher spending on insulation in
homes and car pooling for commuters. The demand for oil became more elastic in the long-
run.
Effects of Advertising on Demand Curve:
Advertising aims to:
·  Change the slope of the demand curve ­ make it more inelastic. This is done by
generating brand loyalty;
·  Shift the demand curve to the right by tempting the people's want for that specific
product.
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Table of Contents:
  1. INTRODUCTION TO ECONOMICS:Economic Systems
  2. INTRODUCTION TO ECONOMICS (CONTINUED………):Opportunity Cost
  3. DEMAND, SUPPLY AND EQUILIBRIUM:Goods Market and Factors Market
  4. DEMAND, SUPPLY AND EQUILIBRIUM (CONTINUED……..)
  5. DEMAND, SUPPLY AND EQUILIBRIUM (CONTINUED……..):Equilibrium
  6. ELASTICITIES:Price Elasticity of Demand, Point Elasticity, Arc Elasticity
  7. ELASTICITIES (CONTINUED………….):Total revenue and Elasticity
  8. ELASTICITIES (CONTINUED………….):Short Run and Long Run, Incidence of Taxation
  9. BACKGROUND TO DEMAND/CONSUMPTION:CONSUMER BEHAVIOR
  10. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….)
  11. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….)The Indifference Curve Approach
  12. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….):Normal Goods and Giffen Good
  13. BACKGROUND TO SUPPLY/COSTS:PRODUCTIVE THEORY
  14. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):The Scale of Production
  15. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):Isoquant
  16. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):COSTS
  17. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):REVENUES
  18. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):PROFIT MAXIMISATION
  19. MARKET STRUCTURES:PERFECT COMPETITION, Allocative efficiency
  20. MARKET STRUCTURES (CONTINUED………..):MONOPOLY
  21. MARKET STRUCTURES (CONTINUED………..):PRICE DISCRIMINATION
  22. MARKET STRUCTURES (CONTINUED………..):OLIGOPOLY
  23. SELECTED ISSUES IN MICROECONOMICS:WELFARE ECONOMICS
  24. SELECTED ISSUES IN MICROECONOMICS (CONTINUED……………)
  25. INTRODUCTION TO MACROECONOMICS:Price Level and its Effects:
  26. INTRODUCTION TO MACROECONOMICS (CONTINUED………..)
  27. INTRODUCTION TO MACROECONOMICS (CONTINUED………..):The Monetarist School
  28. THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME
  29. THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME (CONTINUED……………..)
  30. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME
  31. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME (CONTINUED………..)
  32. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME (CONTINUED………..):The Accelerator
  33. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS
  34. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….)
  35. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Causes of Inflation
  36. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):BALANCE OF PAYMENTS
  37. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):GROWTH
  38. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Land
  39. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Growth-inflation
  40. FISCAL POLICY AND TAXATION:Budget Deficit, Budget Surplus and Balanced Budget
  41. MONEY, CENTRAL BANKING AND MONETARY POLICY
  42. MONEY, CENTRAL BANKING AND MONETARY POLICY (CONTINUED…….)
  43. JOINT EQUILIBRIUM IN THE MONEY AND GOODS MARKETS: THE IS-LM FRAMEWORK
  44. AN INTRODUCTION TO INTERNATIONAL TRADE AND FINANCE
  45. PROBLEMS OF LOWER INCOME COUNTRIES:Poverty trap theories: