1.Elastic demand and the total-revenue test: Demand is elastic if a decrease in price results in a rise in total revenue, or if an increase in price results in a decline in total revenue. (Price and total revenue move in opposite directions).
2.Inelastic demand and the total-revenue test: Demand is inelastic if a decrease in price results in a fall in total revenue, or an increase in price results in a rise in total revenue. (Price and revenue move in same direction).
3.Unit elasticity and the total-revenue test: Demand has unit elasticity if total revenue does not change when the price changes.
4.The graphical representation of the relationship between total revenue and price elasticity is shown in Figure 6.2.
5.Table 6.2 provides a summary of the rules and concepts related to elasticity of demand.
F.There are several determinants of the price elasticity of demand.
1.Substitutes for the product: Generally, the more substitutes, the more elastic the demand.
2.Theproportion of price relative to income: Generally, the larger theexpenditure relative to one’s budget, the more elastic the demand, because buyers notice the change in price more.
3.Whether the product is a luxury or a necessity: Generally, the less necessary the item, the more elastic the demand.
4.The amount of time involved: Generally, the longer the time period, the more elastic the demand becomes.
G.Table 6.3 presents some real‑world price elasticities. Use the determinants discussed to see if the actual elasticities are equivalent to what one would predict.
H.There are many practical applications of the price elasticity of demand.
1.Inelastic demand for agricultural products helps to explain why bumper crops depress the prices and total revenues for farmers.
2.Governments look at elasticity of demand when levying excise taxes. Excise taxes on products with inelastic demand will raise the most revenue and have the least impact on quantity demanded for those products.