Authors libby rittenberg 242

demanded changes by a larger percentage than price (i.e., if demand is
price elastic), total revenue will change in the direction of the quantity
change. If price changes by a larger percentage than quantity demanded
(i.e., if demand is price inelastic), total revenue will move in the direction
of the price change. If price and quantity demanded change by the same
percentage (i.e., if demand is unit price elastic), then total revenue does not
change.
When demand is price inelastic, a given percentage change in price results
in a smaller percentage change in quantity demanded. That implies that
total revenue will move in the direction of the price change: a reduction in
price will reduce total revenue, and an increase in price will increase it.
Consider the price elasticity of demand for gasoline. In the example above,
1,000 gallons of gasoline were purchased each day at a price of $4.00 per
gallon; an increase in price to $4.25 per gallon reduced the quantity
demanded to 950 gallons per day. We thus had an average quantity of 975
gallons per day and an average price of $4.125. We can thus calculate the
arc price elasticity of demand for gasoline:
Percentage change in quantity demanded=−50/975=−5.1%

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Price elasticity of demand=−5.1%/6.06%=−0.84

Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

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