In fact, a more advanced economic concept regarding total revenue, shows that total revenue is always maximized where the PED = 1, which occurs at the midpoint of the straight line demand curve. This was a decrease in revenue by 9 dollars. However, when the price is lowered to $1 and the QD increases from 10 units to 11 units, the new total revenue is $1x11units = $11. At a price tag of $2 and a demand of 10 units the total revenue is $2x10units = $20. However, if we look at the other end of the demand curve and check our revenue we see something very different. But, when we lower the price to $9 and see the increase in QD to 2 units then the total revenue goes from $10 to $9x2units = $18. At a price of $10 and a QD of 1, the total revenue was $10x1unit = $10. If you think about this in terms of pure revenue, then we see why this concept is important. When the price was $10 and the QD was at 1 unit, then a relatively small change in price (a 10% decrease) led to a relatively large change in quantity demanded (100% increase). However, if at a price of $2 the QD was 10 units, and at $1 the QD is at 11 units, then the cutting of the price in half only led to a 10% increase in the quantity demanded.īut when we look at the elasticity, we see that the percentage of the price change is much smaller or larger compared to the percentage change in the quantity demanded. This is still a 1 dollar change in price. This would be the same on the other end of the demand curve when we have, say, a $2 price tag and drop the price to $1. Thus, a 1 to 1 ratio between price and QD. ![]() If we look at the slope of the curve, we note that there was a $1 decrease in the price and 1 unit increase in the quantity demanded. If that $1 decrease in price leads from 1 unit being demanded to 2 units being demanded, then the QD doubled (or increased by 100%). However, the PED will change as we move along the demand curve.įor example, if we have a $10 price tag and we lower the price to $9 then that 1 dollar change in price is a 10% decrease in the price. If we have a straight line demand curve with a 1 to 1 ratio, then for every $1 of price change we will see a 1 unit change in QD. PED is not a measure of the Slope of the Curve. The slope of the curve is a product of the ratio of the rise to run. We take the absolute value because the sign will always be negative due to the law of demand (a positive change in price would lead to a negative change in QD and vise versa). The formula for measuring PED is %Change in QD (divided by) the % change in Price of the product. This means we are measuring the amount movement (shift) of the whole demand curve in response to a change in consumers' income. YED measures the response to a change in the Income of the people buying the good. This means that we are measuring the amount of movement (shift) of the whole demand curve when there is a change in the price of another good. XED measures the response to a change in the price another good. We are measuring how much a certain percentage change in price will affect the overall percent change in the quantity demanded. ![]() ![]() This means that we are measuring the movement along the curve. ![]() PED measures the response to a change in the price of the good itself. There are three types of elasticity we discuss regarding the demand curve.Įach of these is a measure of the response to a change. Elasticity is a measure of how much response there is to a change.
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