03+Elasticity

Assume firms are increasing gasoline prices to increase total revenues, and firms are reducing prices on christmas goods to increase total revenues. So how is that firms increasing prices increase total revenue, and firms decreasing prices also increase total revenue? Below is a diagram with two graphs. The left graph depicts a relatively more steeply sloped demand curve, with prices rising from point A to point B, the case of gas prices. The right side graph depicts a relatively less steeply sloped demand curve, with prices falling from point C to point D, the case of christmas goods. Add a new layer. In the left side graph add a supply curve (S1) crossing at point A, then draw a second curve (S2) that is leftward and upward to point B (this represents a decrease in supply which increases prices). Calculate the total revenue at each point, explain determine whether total revenue rises or falls, calculate the price elasticity of demand, and determine whether the coefficient is elastic or inelastic. Add another new layer. In the right side graph add a supply curve (S1) crossing at point C, then draw a second curve (S2) that is rightward and downward to point D (this represents an increase in supply which decreases prices).



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 * Num || Name || Diagram and Explanation ||  ||
 * 1 || Sally Smith

At point A the TR is $20 and at point B the TR is $40. Therefore, the total revenue increases despite the leftward shift in the supply curve. The increased equilibrium price more than offsets the decrease supply quantity. The elasticity of demand is 0.56, meaning that this is an inelastic demand curve (Greater than 0, but less than 1). For point C, TR is 200 and at point D, TR is 300. Therefore TR increases when the supply curve shifts to the right. The decrease in price is more than offset by the increase in quantity demanded. The elasticity of demand is 1.5 meaning that the demand is elastic becasue the coefficient is greater than 1. ||  || ||
 * 2 || John Doe

Total Revenue at A: $20 Total Revenue at B: $40 ^^ TR rises (by $20) Total Revenue at C: $20 Total Revenue at D: $30 ^^ TR rises (by $10) Price Elasticity of Demand for left graph: .56 (inelastic because its absolute value is less than 1) Price Elasticity of Demand for right graph: 1.49 (elastic because its absolute value is greater than 1) ||  ||
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