Elasticity and Total Revenue

Elasticity of Demand

What this measures is the change in quantity when the price changes – it is determined by dividing the change in Quantity by the change in Price. So:

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Lets look at that!!

I like to buy and consume crsipy apples. I normally buy 12 apples when they cost $1.00 each, but the price just increased and they now cost me $2.00 each, and I will only buy 8 apples at that price.

The price increased by (2-1=1) $1 dollar, and as per the Law of Demand my Quantity Demand declined by (12-8=4) apples – simply applying the above equation would yield

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“4” being the elasticity of demand – but suppose instead of $1 and $2 the price had been $100 and $200, then the EofD would be

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In this case the EofD changes with the size of units and that isn’t a good thing, because it actually is the same for both cases, to avoid this economists use Percetage Change.

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So lets look at how we find both the “Percentage Change in Qunatity and the Percentage Change in Price”. A percetgae is a ‘fraction x 100”, so ½ as a pecetage is ½ x 100 = 50%. If I divide a percentage by a percentage, the percentages cancel each other out so 50%/25% = 2 [note there are no % in the answer].

Percentage Change in Qunatity

I used to buy 12 apples I now buy 8 apples? What is my Percentage Change in Qunatity?

I now buy 4 less apples, so do I buy 4/8x100=50% less or 4/12x100= 33% less? That is the problem, there are n rules that tell you want the fraction’s denominator (bottom number) is it 8 or 12. Economist to avoid this problem have designated a mid point method to elaiminate this confusion. In this case the denominator is found by taking the average of the before and after Quantities, so (12+8)/2 = 20/2=10.

Using 10 as the denominator tells me I buy 4/10 x 100 or 40% less apples with a change in price from $1 to $2.

Percentage Change in Price

Now looking at the change in price. Lets start with the increase from $1...