Saturday, September 26, 2009
Total Revenue Test in AP Microeconomics
One of the best memory devices I know for elasticity is this one. I use a rubberband and a ruler to show how the price is related to elasticity. If the price increases and total revenue goes down, the good is elastic. If the price increases and total revenue increases, the good is inelastic.
When people complain about how much money oil companies make when the price increases, they assume that oil companies control the price since total revenue goes up. These people don't understand monopolies since a monopoly never sets a price on the inelastic part of the demand curve. In order for a company to be on the inelastic part of the demand curve, the price must be low.