5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

In Figures 7.4 and 7.5, we can graphically illustrate the connection between the

demand curve, elasticity, and total revenue.

80 á Step 4. Review the Knowledge You Need to Score High

Demand

0

1

2

3

4

5

6

7

0123456

Qd

$ Price

P = 6-Qd

Total Revenue

0

2

4

6

8

10

0123456

Qd

$ TR

Figure 7.4

Figure 7.5

Income Elasticity of Demand

In the case of the income elasticity, it is a measure of how sensitive consumption of good

X is to a change in a consumer’s income.

EI=(% DQdgood X )/(% Dincome)

Example:

Jason’s income rises 5 percent, and we see his consumption of fast-food meals rises

10 percent.

EI=10%/5% = 2

So what do we make of this? First, because EIis greater than zero, we can determine

that fast-food meals are a normal good for Jason. Second, at least in this example, the

TIP

KEY IDEA

• Inelastic demand Ed<1: % DQd<% DP, so total revenue increases with a price
  increase.


• Elastic demand Ed>1: % DQd>% DP, so total revenue decreases with a price
  increase.


• Unit elastic demand Ed=1: % DQd=% DP, so total revenue remains the same.

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