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Program: GM 2
Percent charge A
Percent chargeB
Dividing the first expression by the second, we arrive at the expression for the price
elasticity of demand:
Quantity Price Quantity
=
Quantity
Price
Price
Q2Q1
P2P1
TR
Q
Figure 1 The Relationship between Price Elasticity and Total Revenue (TR)
Marginal Revenue (MR) is positive as total revenue rises (and the demand curve is elastic).
When total revenue reaches its peak (elasticity equals 1), marginal revenue reaches zero.
Q A P B
QA
PB
Income Elasticity
Income elasticity is a term we use to measure the sensitivity of demand for a product to changes
in the income of the population. This represents quantity of sales as a function of (i.e., influenced
by) consumers' income. The general expression for this elasticity is as follows:
Ey = %Q %Y
where Y represents income. The definition of income elasticity is a measure of the percentage
change in quantity consumed resulting from a 1 percent change in income.
Elasticity of Supply
The price elasticity of supply measures the percentage change in quantity supplied as a result of a
1 percent change in price. In other words, this elasticity is a measure of the responsiveness of
quantities produced by suppliers to a change in price. Thus, the arc coefficient of supply
elasticity,
Es =
Q2Q1
P2 P 1
is a positive number: quantity and price move in the same direction. The interpretation of the
coefficient is the same as for the case of demand elasticity. The higher the coefficient, the more
quantity supplied will change (in percentage terms) in response to a change in price. Again, as in
the case of demand elasticity, it is important for a manager to know how supply elasticity affects
price and quantity when demand changes. When the supply curve is more elastic, the effect of a
change in demand will be greater on quantity than on price of the product. In contrast, with a
supply curve of low elasticity, a change in demand will have a greater effect on price than
quantity.