AP_Krugman_Textbook

■ When demand is unit-elastic,the two effects exactly balance each other out; so a fall
in price has no effect on total revenue.

■ When demand is inelastic,the price effect dominates the quantity effect; so a fall in
price reduces total revenue.

■ When demand is elastic,the quantity effect dominates the price effect; so a fall in
price increases total revenue.

Price Elasticity Along the Demand Curve

Suppose an economist says that “the price elasticity of demand for coffee is 0.25.”
What he or she means is that at the current pricethe elasticity is 0.25. In the previous dis-
cussion of the toll bridge, what we were really describing was the elasticity at the priceof
$0.90. Why this qualification? Because for the vast majority of demand curves, the
price elasticity of demand at one point along the curve is different from the price elas-
ticity of demand at other points along the same curve.
To see this, consider the table in Figure 47.4, which shows a hypothetical demand
schedule. It also shows in the last column the total revenue generated at each price and
quantity combination in the demand schedule. The upper panel of the graph in Figure

module 47 Interpreting Price Elasticity of Demand 471

Section 9 Behind the Demand Curve: Consumer Choice

D

0

01234567 98 10

$25

24

21

16

9

Quantity

Total

revenue

0 1234567 98 10

$10

9 8 7 6 5 4 3 2 1

Quantity

Price

Demand is elastic:

a higher price reduces

total revenue.

Elastic

Inelastic

Unit-elastic

Demand is inelastic:

a higher price increases

total revenue.

$0

1 2 3 4 5 6 7 8 9

10

$0

9

16

21

24

25

24

21

16

9

0

10

9 8 7 6 5 4 3 2 1 0

Total

revenue

Quantity

demanded

Demand Schedule and Total Revenue

for a Linear Demand Curve

Price

figure 47.4 The Price Elasticity of Demand Changes Along the Demand Curve

The upper panel shows a demand curve correspon-

ding to the demand schedule in the table. The lower

panel shows how total revenue changes along that

demand curve: at each price and quantity combina-

tion, the height of the bar represents the total rev-

enue generated. You can see that at a low price,

raising the price increases total revenue. So de-

mand is inelastic at low prices. At a high price,

however, a rise in price reduces total revenue. So

demand is elastic at high prices.