R Larry Reynolds - 1999

Elasticity is a measure of the responsiveness of one variable (a dependent variable) to changes in

another variable. The coefficient of elasticity is defined as the percentage change in a dependent
variable associated with a percentage change in an independent variable.
In economics the percentage change in the quantity demanded of a good caused by a change in
the price of that same good is called the "own" price elasticity of demand or price elasticity.
The change in demand associated with a change in income is called income elasticity. A change in
demand caused by a change in the price of some other good is called cross elasticity. Elasticity
can also be used to measure the responsiveness of suppliers to changes in price.
Elasticity is a concept that is used to characterize a variety of relationships.

(c) R Larry Reynolds 06/17/2011

 R Larry Reynolds - 1999

ariable) to changes in
change in a dependent

used by a change in
r price elasticity.

asticity. A change in
lasticity. Elasticity
rice.

s.

(c) R Larry Reynolds 06/17/2011

Elasticity

Change intercepts

Given a demand function: Q =

Which can be written:

Instructions

Demand Function

$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00

21.4
23.7
26
28.3
30.6
32.9
35.2
37.5
39.8
42.1
44.4
46.7
49

Point price elasticity = -1.3660

A 1% change in price will cause a

1.37% change Q demanded

$5.00

$0.00

QUANTITY /UT

R Larry Reynolds - 1999

(c) R. Larry Reynolds 06/17/2011

$12.30 20.71
$12.30
0
0 20.71
20.71

45

19.1

$10.00

40

$13.00

At price P = $12.30

$12.30

35

16.8

Slope of Q = f (P) = -2.3

Ratio of P /Q = 0.59
Questions

$15.00

30

$14.00

About slope

25

3
5.3
7.6
9.9
12.2
14.5

20

$20.00
$19.00
$18.00
$17.00
$16.00
$15.00

0.43

Quantity is Q = 20.71

15

0.7

10

$21.00

At a price, P = $12.30

-1.6

2.3

$20.00

$22.00

P = 21.3

$25.00

Quantity
-8.5
"Point" price elasticity
-6.2
-3.9

PRICE ($)

Price
$25.00
$24.00
$23.00

Change slope of Q =f(P)

49

R Larry Reynolds 1999

$12.30

50

45

40

35

30

25

20

NTITY /UT

(c) R. Larry Reynolds 06/17/2011

Revenue Change the slope and intercept values with control buttons below.
Instructions

Which can be written:

Demand Function
Price
$25.00
$24.00
$23.00
$22.00
$21.00
$20.00
$19.00
$18.00
$17.00
$16.00
$15.00
$14.00
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00

Point Price
Quantity Elasticity
1.5
-38.33
3.8
-14.53
6.1
-8.67
8.4
-6.02
10.7
-4.51
13
-3.54
15.3
-2.86
17.6
-2.35
19.9
-1.96
22.2
-1.66
24.5
-1.41
26.8
-1.20
29.1
-1.03
31.4
-0.88
33.7
-0.75
36
-0.64
38.3
-0.54
40.6
-0.45
42.9
-0.38
45.2
-0.31
47.5
-0.24
49.8
-0.18
52.1
-0.13
54.4
-0.08
56.7
-0.04
59
0.00

(c) R. Larry Reynolds 06/17/2011

Revenue Functions
TR
AR
MR'
$37.50
$25.00
24.35
$91.20
$24.00
22.35
$140.30
$23.00
20.35
$184.80
$22.00
18.35
$224.70
$21.00
16.35
$260.00
$20.00
14.35
$290.70
$19.00
12.35
$316.80
$18.00
10.35
$338.30
$17.00
8.35
$355.20
$16.00
6.35
$367.50
$15.00
4.35
$375.20
$14.00
2.35
$378.30
$13.00
0.35
$376.80
$12.00
-1.65
$370.70
$11.00
-3.65
$360.00
$10.00
-5.65
$344.70
$9.00
-7.65
$324.80
$8.00
-9.65
$300.30
$7.00
-11.65
$271.20
$6.00
-13.65
$237.50
$5.00
-15.65
$199.20
$4.00
-17.65
$156.30
$3.00
-19.65
$108.80
$2.00
-21.65
$56.70
$1.00
-23.65
$0.00
$0.00
-25.65
$378.30

Q =

59

P = 25.65

As you change the demand function, look for

the price and quantity that yield the
maximum TR. Observe the coefficient of
elasticity and MR at that price.

What are the relationships of MR and

elasticity to the maximum value of TR?
The maximum TR is
approximately

$378.30

(The number may not be precisely the maximum

because the prices change in increments of $1)
R Larry Reynolds 1999

(c) R. Larry Reynolds 06/17/2011

2.3

0.43 Q

DEMAND
$25.00

nships of MR and
mum value of TR?
$378.30

$15.00
$10.00
$5.00

50

45

Column A

40

QUANTITY /UT

35

30

25

20

(c) R. Larry Reynolds 06/17/2011

15

R Larry Reynolds 1999

10

$0.00

be precisely the maximum

ange in increments of $1)

$20.00

PRICE ($)

mand function, look for

y that yield the
e the coefficient of
that price.

(c) R. Larry Reynolds 06/17/2011

Q =

Use spinner control to change intecept and slope of demand

This function can be written:

Instructions

Demand Function

Total
Revenue

(c) R. Larry Reynolds 06/17/2011

$250

$200

$150

$100

$50

$0

QUANTITY /UT
The maximum TR is
approximately
R Larry Reynolds 1999

$244.00

40

$244.00
$243.96
$242.64
$240.04
$236.16
$231.00
$224.56
$216.84
$207.84
$197.56
$186.00
$173.16
$159.04
$143.64
$126.96
$109.00
$89.76
$69.24

$300

35

12.20
12.84
13.48
14.12
14.76
15.40
16.04
16.68
17.32
17.96
18.60
19.24
19.88
20.52
21.16
21.80
22.44
23.08

$2.94
$0.94
-$1.06
-$3.06
-$5.06
-$7.06
-$9.06
-$11.06
-$13.06
-$15.06
-$17.06
-$19.06
-$21.06
-$23.06
-$25.06
-$27.06
-$29.06
-$31.06
-$33.06

1.56

30

$20.00
$19.00
$18.00
$17.00
$16.00
$15.00
$14.00
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00

-1.16
-1.05
-0.95
-0.85
-0.77
-0.69
-0.62
-0.56
-0.50
-0.44
-0.39
-0.34
-0.30
-0.26
-0.22
-0.18
-0.15
-0.11
-0.08

P = 39.06 -

25

$242.76

0.64

20

11.56

25

15

$21.00

10

-$24.00
$1.56
$25.84
$48.84
$70.56
$91.00
$110.16
$128.04
$144.64
$159.96
$174.00
$186.76
$198.24
$208.44
$217.36
$225.00
$231.36
$236.44
$240.24

Quantity
-0.60
0.04
0.68
1.32
1.96
2.60
3.24
3.88
4.52
5.16
5.80
6.44
7.08
7.72
8.36
9.00
9.64
10.28
10.92

Marginal
Revenue
$40.94
$38.94
$36.94
$34.94
$32.94
$30.94
$28.94
$26.94
$24.94
$22.94
$20.94
$18.94
$16.94
$14.94
$12.94
$10.94
$8.94
$6.94
$4.94

Price
$40.00
$39.00
$38.00
$37.00
$36.00
$35.00
$34.00
$33.00
$32.00
$31.00
$30.00
$29.00
$28.00
$27.00
$26.00
$25.00
$24.00
$23.00
$22.00

Point
Elasticity
42.67
-624.00
-35.76
-17.94
-11.76
-8.62
-6.72
-5.44
-4.53
-3.84
-3.31
-2.88
-2.53
-2.24
-1.99
-1.78
-1.59
-1.43
-1.29

PRICE, TR ($)

Elasticity

$2.00
$1.00
$0.00

23.72
24.36
25.00

$47.44
$24.36
$0.00
$244.00

(c) R. Larry Reynolds 06/17/2011

-0.05
-0.03
0.00

-$35.06
-$37.06
-$39.06

64

50

45

40

35

30

25

NTITY /UT

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(c) R. Larry Reynolds 06/17/2011

Elasticity

Change intercepts

Which can be written:

Instructions

42

1.8

P = 23.33 -

0.56

Change slope of Q=f(P)

$20

$15

$13
$11

$10

$5

40

35

30

25

20

15

10

$0

(c) R. Larry Reynolds 06/17/2011

$25

Quantity
-3
Select two prices, P1, P2
-1.2
P1 = $12.80
0.6
Then, Q1 = 18.96
2.4
4.2
P2 = $10.90
6
then
Q2 = 22.38
7.8
9.6
Given P1 and P2, the
11.4
-18.038%
Percentage change in Q =
13.2
14.844%
Percentage change in P =
15
Arc
Elasticity
16.8
Arc Elasticity between P1 and P2
18.6
is -1.032
20.4
22.2
24
25.8
27.6
29.4
31.2
33
109 $12.80
34.8
128 $10.90
36.6
$12.80
18.96
$10.90
38.4
0
18.96
0
40.2
$12.80
0
$10.90
42
$12.80
18.96
$10.90

PRICE ($)

Demand Function
Price
$25.00
$24.00
$23.00
$22.00
$21.00
$20.00
$19.00
$18.00
$17.00
$16.00
$15.00
$14.00
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00

Given a demand function: Q =

QUANTITY /UT

R Larry Reynolds 199

18.96
22.38
22.38
22.38
22.38
0

(c) R. Larry Reynolds 06/17/2011

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P
Q

$13
$11

50

45

40

35

30

25

ANTITY /UT
R Larry Reynolds 1999

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