Elasticity of Demand and Total Revenue

… a core concept in Economic Analysis and Atlas102

Click for MRU video, minute 2:50

Click for MRU video, minute 7:30

Concept description

Alex Tabarrok describes in his MRU video (link on right, reference below) how the elasticity of demand affects total revenue.

In the video, Tabarrok works through the cases of inelastic demand, where revenues rise as price rises, as elastic demand, where revenues fall as price rises, as displayed in the graphs below.

 

revenuerisesaspricerises

revenuesfallsummaryelasticityanddemand

The problems with prohibition and the war on drugs

Tabarrok uses these concepts to explain why the war on drugs is so hard to win:

“Because demand for most illegal drugs is inelastic, drug dealers earn greater revenue and gain more power as the drug war becomes more effective.”

This can be seen in the following graph:

ElasticityAndProhibition

Record draught and record corn revenues

Tabarrok’s second policy example is the counterintuitive (to non economists) result of the 2012 drought in the American Midwest, when the average U.S. cornfield yielded less per acre than any year since 1995 but, on average, corn growers took in record revenues from their product.

Practice questions

Source

Alex Tabarrok, Calculating the Elasticity of Demand, Marginal Revolution University, minutes 7:30 to end in the 16-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/calculate-elasticity-demand-formula, accessed 28 April 2016.

Atlas topic and subject

Consumer Theory and Elasticity of Demand and Supply (core topic) in Economic Analysis.

Page created by: Ian Clark, last modified on 28 April 2016.

Image: Minute 0.50 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/calculate-elasticity-demand-formula, accessed 28 April 2016.