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Wize AP Microeconomics Textbook > Elasticity

Different Elasticities Along the Demand Curve and Total Revenue

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Different Elasticities Along the Demand Curve and Total Revenue


Expenditure (Total Revenue) = P×Q\boxed{\text{Expenditure (Total Revenue) }=~ P \times Q}

Inelastic

If Price increases, Total Revenue will
increase

If Price decreases, Total Revenue will
decrease

Elastic

If Price increases, Total Revenue will
decrease

If Price decreases, Total Revenue will
increase

Unit Elastic

If Price increases, Total Revenue will
stay the same

If Price decreases, Total Revenue will
stay the same


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Different Elasticities Along Demand

  • The bottom half of the demand curve (between points B and C) is always the inelastic portion of demand. Example: If the price of shoes are at $1 and now they double to $2, you would probably still buy the shoes because they represent such a small portion of your income. This means you are insensitive to the price (inelastic).
  • The top half of the demand curve (between points A and B) is always the elastic portion of demand. Example: If the price of shoes are at $200 and now they double to $400, you would probably be more sensitive because it represents a bigger portion of your income (elastic).
  • The middle of the demand curve (point B) is always the unit elastic point of demand. This is because it is exactly between the elastic and inelastic portions.
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Total Revenue Graph

  • From point A to B the price is decreasing and it is the elastic portion of demand. As we saw earlier, this means total revenue will increase.
  • From point B to C the price is decreasing and it is the inelastic portion of demand. As we saw earlier, this mean total revenue will decrease.
  • At point B (unit elastic) total revenue is at its maximum
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Example: Different Elasticities Along the Demand Curve and Total Revenue

a) The demand equation is P = 70 – 2Q. At what price is demand unit elastic?

$35

Demand is unit elastic exactly at the midpoint. The number 70 in the equation tells us that is the vertical (y) intercept of demand. If 70 is the intercept this means the midpoint must be 70/2 = 35.





b) At what price is total revenue maximized using the demand equation above?


$35

This is a different way of asking the same question as above. Total revenue is also maximized at the midpoint of demand.