The Total Revenue Test of Price Elasticity of Demand

By looking at how a change in price affects the total revenues of producers in a market (whether TR increases or decreases) we can draw some quick and accurate conclusions about whether demand for a good is elastic, inelastic or unit elastic between two prices. We’ll also learn that even along a straight-line demand curve there is a RANGE of elasticities of demand for every good.

 

Part 1

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Price Elasticity of Supply and its Determinants

This lesson introduces the concept of price elasticity of supply, including the formula, calculating PES, and an explanation of the determinants of PES. The responsiveness of producers of two goods, cotton and blue jeans, are illustrated as an example of how PES may vary for different goods.

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Cross Price Elasticity of Demand (XED) and its Determinants

This lesson introduces the concept of cross price elasticity of demand, or the responsiveness of consumers of one good to a change in the price of a related good. We’ll outline the formula, walk through a couple of examples, interpret the results and discuss what factors determine the cross price elasticity of demand between two goods.

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Income Elasticity of Demand

Our final lesson on elasticities will examine the responsiveness of consumers of a good to a change in their own incomes. The lesson introduces the formula for YED, gives an example of how to calculate YED for both a normal good and an inferior good and explains the different possible values of the YED coefficient.

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Applications of Elasticity (PED, XED and YED)

Why does a knowledge of elasticity matter to businesses, the government and other stakeholders? This lesson explains the significance of price elasticity of demand, cross elasticity of demand and income elasticity of demand for producers and the government.

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