Overview: Elasticity and Revenue

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This group of readings extends the discussion of supply and demand curves by examining concepts that can be derived from them, concepts that are important building blocks for later groups of readings. It introduces the concept of elasticity, a measure of how people respond to change. An elasticity computation can be made whenever a measurable change in the economic environment causes a measurable change in behavior. The most commonly used elasticity measures are income elasticity, cross-price elasticity, and price elasticities of supply and demand. Next we see how value can be represented on a demand-curve graph and meet the very important concept of marginal, examining how marginal, total, and average revenue are related. Finally we learn that price elasticity of demand and marginal revenue are related by means of a simple equation.

After you complete this unit, you should be able to:

  • Compute price elasticities of supply and demand when given the curves in the form of a table.
  • Explain what is meant when one says demand is elastic or when one says demand is inelastic.
  • Define income and cross-price elasticity, and explain what they measure.
  • Compute marginal revenue when given total revenue, and vise versa.
  • Compute average revenue when given total revenue, and vise versa.
  • Explain why marginal revenue is the slope of the total revenue curve.
  • Recognize the area that represents total revenue on a demand or supply graph.
Copyright Robert Schenk