Elasticity along a straight-line demand curve

- a demand curve has a constant slope. Figure 504 illustrates the calculation of
elasticity along a hypothetical straight-line demand curve for oil.
Lets calculate the price elasticity of demand for oil when the price rises by $20 from
$30 to $40 a barrel. The average price in this case is $40 and so proportionate
change in price is:
When the price rises from 30 to 50 a barrel, the quantity falls by 8 million barrels
per day from 8 to zero and the average quantity demand is 4 million barrels. So the
proportionate in the price to calculate price elasticity of demand:
On a straight-line demand curve, the price elasticity is always 1 at the midpoint.
Above the midpoint demand is elastic, and below the midpoint demand is inelastic.
Demand is perfectly elastic (infinity) where the quantity demanded is zero and
perfectly inelastic (zero) where the price is zero.

Elasticity and total revenue

Total revenue from the sale of a good equals the price of the good multiplied by the
quantity sold. So can oil producers like OPEC increase total revenue by cutting
supply and raising price? When a price changes, total revenue changes. But a rise in
price does not always increase total revenue. The change in total revenue depends
on the elasticity of demand:

If demand is elastic, a 1 per cent price rise decreases the quantity sold by
more than 1 per cent and total revenue decreases
If demand is unit elastic, a 1 percent price rise decreases the quantity sold by
1 per cent and so total revenue does not change.
If demand is inelastic, a 1 per cent price rise decreases the quantity sold by
less than 1 percent and total revenue increases.

Figure 5.5 shows how we can use this relationship between elasticity and total
revenue to estimate elasticity using the total revenue test. The total revenue test is
a method of estimating the price elasticity of demand by observing the change in
total revenue that results from a price change (other things constant).

If a price rise decreases total revenue, demand is elastic

If a price rise increases total revenue, demand is inelastic
If a price rise leaves total revenue unchanged, demand is unit elastic

Figure 5.5 (a) shows the same hypothetical demand curve for oil as in Figure 5.4.
Over the price range from $50 to $25, demand is elastic. Over the price range from
$25 to zero, demand is inelastic. At a price of $25, demand is unit elastic. In figure

5.5(b) you can see how total revenue changes. At a price of $50, the quantity sold is
zero so total revenue is also zero. At a price of zero, the quantity demanded is 20
million barrels a day, but at a zero price, total revenue is again zero. A price rise in
the elastic range brings decreases In total revenue the percentage decreased in
the quantity demanded is greater than the percentage increase in price. A price rise
in the inelastic range brings an increase in total revenue the percentage decrease
in the quantity demanded is less than the percentage increase in price. As the point
of unit elasticity, total revenue is at a maximum.
So, if when the price of any good rises and you spend less on it, your demand for
that good is elastic, if you spend the same amount, your demand is unit elastic; and
if you spend more, your demand is inelastic.