Page 73 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Such horizontal demand curves, where quantity demanded is infinitely responsive to
price changes, are called perfectly elastic demand curves.
These perfectly elastic demand curves have a property that when price decreases total
revenue increases, and vice-versa.
The elasticity coefficient, E , is equal to infinity (E = ).
d d
3. The demand curve D in Figure 5.2(b) above represents the midpoint of a spectrum where
b
extremes are represented by the demand curves D and D .
a c
In the case of D when price decreases from $10 to $5, the total revenue remains unaffected
b
at $500, such a demand curve is said to be unitary elastic and has the property that when
price increases or decreases, the total revenue remains constant. The elasticity coefficient
for such demand curves is equal to one. Examples of unitary elastic demand curves occur
when a person budgets a certain amount of money for, say, meat or magazines and will
not deviate from that figure regardless of price. However, such cases are also unusual in
that few demand curves have constant unitary elasticity.
4. Besides the three types of demand curves we have discussed there are two more types of
demand curves.

Demand curves which have an elasticity coefficient between 0 and 1 are called relatively
inelastic or simply inelastic. When the price falls, the quantity demanded expands but
total revenue still decreases. Figure 5.3(a) shows D as an example of a relatively inelastic
a
curve.
Figure 5.3

Finally, demand curve D in Figure 5.3(b) is an example of a relatively elastic or simply elastic
b
demand curve. Such demand curves have an elasticity coefficient between 1 and and have the
property that when price decreases total revenue increases and vice-versa.
Believe it or not, in the real world, 99.99 per cent of the demand curves are either relatively
elastic or relatively inelastic.
Table 5.1 summarises the discussion we have had so far. It tells us how the firm's total revenues
(and the consumer's total expenditures) for a product will change as prices are raised or lowered.
As shown in the table the value of the elasticity coefficient, E , can be anything from zero to
d
infinity and each value can immediately tell us the elasticity of the demand curve at the relevant
price. For instance, if a demand curve has an elasticity coefficient of 0.5 at a given price, then we
know that this is an inelastic demand curve at that price.

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