Elastic vs. Inelastic Demand: How the Total Revenue Test Works

📚 Quick Study Guide

• 📏 Elastic Demand: Quantity demanded changes significantly with a price change.
• 🧱 Inelastic Demand: Quantity demanded changes very little with a price change.
• 💰 Total Revenue (TR): The total income a seller receives from selling a product. Calculated as $TR = Price \times Quantity$.
• 📈 Total Revenue Test: Examines how total revenue changes when price changes to determine elasticity.
• 📝 Elastic Demand & Total Revenue:
  • Price Increase: Total Revenue Decreases
  • Price Decrease: Total Revenue Increases
• 📉 Inelastic Demand & Total Revenue:
  • Price Increase: Total Revenue Increases
  • Price Decrease: Total Revenue Decreases
• ♾️ Perfectly Elastic Demand: A very small change in price will cause a very large change in quantity demanded. The demand curve is horizontal.
• 0️⃣ Perfectly Inelastic Demand: Quantity demanded does not respond to a change in price. The demand curve is vertical.

Practice Quiz

1. Which of the following defines elastic demand?
   1. A) Quantity demanded changes very little with a price change.
   2. B) Quantity demanded changes significantly with a price change.
   3. C) Quantity demanded does not change with a price change.
   4. D) Price does not affect quantity demanded.
2. What is the formula for Total Revenue (TR)?
   1. A) $TR = Price + Quantity$
   2. B) $TR = Price - Quantity$
   3. C) $TR = Price \times Quantity$
   4. D) $TR = Price / Quantity$
3. According to the Total Revenue Test, if demand is elastic and the price increases, what happens to total revenue?
   1. A) Total Revenue Increases
   2. B) Total Revenue Decreases
   3. C) Total Revenue Stays the Same
   4. D) Total Revenue Doubles
4. If demand is inelastic and the price decreases, what happens to total revenue?
   1. A) Total Revenue Increases
   2. B) Total Revenue Decreases
   3. C) Total Revenue Stays the Same
   4. D) Total Revenue is Zero
5. Which of the following goods is most likely to have inelastic demand?
   1. A) Luxury Yachts
   2. B) Designer Clothing
   3. C) Life-saving Medication
   4. D) Restaurant Meals
6. A perfectly elastic demand curve is:
   1. A) Vertical
   2. B) Horizontal
   3. C) Upward Sloping
   4. D) Downward Sloping
7. What does it mean if the demand for a product is perfectly inelastic?
   1. A) A small change in price leads to a large change in quantity demanded.
   2. B) Quantity demanded does not respond to a change in price.
   3. C) Any increase in price will cause demand to fall to zero.
   4. D) The product is a luxury good.