Modern Principles of Economics

What happens to seller revenues when the demand curve is inelastic and the price rises? (Review Figure 5.3 if you don’t know immediately.) When the demand curve is inelastic, an increase in price increases seller revenues. In Figure 5.5, the blue rectangle is seller revenues at the no prohibition price; the much larger green rectangle is seller rev

elasticity of supply

The lesson is that whether a demand curve is elastic or inelastic has a tremendous influence on how an industry evolves over time. If you want to be in on a growing industry, it helps to know the elasticity of demand.

deadweight loss

Important Demand Shifters Income Population Price of substitutes Price of complements Expectations Tastes

There are few substitutes for oil in its major use, transportation, so when the price increases by a lot, the quantity demanded falls by only a little. Thus, the demand curve for oil is not very elastic and would be best represented by demand curve I.

Important Supply Shifters Technological innovations and changes in the price of inputs Taxes and subsidies Expectations Entry or exit of producers Changes in opportunity costs

The demand for oil tends to become more elastic over time because the more time people have to adjust to a price change, the better they can substitute one good for another. In other words, there are more substitutes for oil in the long run than in the short run.

substitutes If two goods are substitutes a decrease in the price of one good leads to a decrease in demand for the other good.