Econ 1100 1st Edition Lecture 8Outline of Previous Lecture- Supply and Demand Continued • Change in both demand and supply simultaneously • The Math Outline of Current Lecture- Total Revenue Test - Total Revenue Test Examples Current Lecture- Total revenue test • Relationship between the price elasticity of demand and total revenue • Total revenue (TR) is equal to quantity (Q) multiplied by price (P) • If the price elasticity of demand is elastic (calculation of absolute value of elasticity of demand > 1), if market price goes up, the total revenue decreases and ifthe market price goes down, the total revenue increases • If price elasticity of demand is inelastic (calculation of absolute value elasticity of demand < 1), if market price goes up, the total revenue increases and if the market price goes down, the total revenue decreases If price elasticity of demand is unit elastic (calculation of absolute value elasticity of demand = 1), if market price goes up, the total revenue has no change and if the market price goes down, the total revenue has no change - Total Revenue Test Examples• Rice Seed/ Hybrid Technology andRice Farmers Income- If demand for rice is price inelastic, an increase in technology leads to a decrease in the market price. - A decrease in market priceresults in a decrease in total revenueto rice farmers.• Watch market-If the watch market is elastic, then a decrease in market price will lead to anincrease in total revenue.• Illegal Drugs-Drug Interdiction Policy• If price elasticity of illegal drugs is inelastic, under drug interdiction policy, this results in market prices rising and therefore arise in total revenue, increasing the incentive tojoint the market.- Drug Education Policy•If price elasticity os inelastic, undera drug education policy, this results in lower prices and therefore lower total revenue, reducing the incentive to be in the
View Full Document