1. Revenue

1. Total, average and marginal revenue
   
   Total revenue = P x Q (price times quantity)
   
   Average revenue = P x Q/Q = P (total revenue/quantity)
   
   Marginal revenue = Q = TR/Q (the additional revenue from selling one more unit of output)
   
   Teaching Strategy: Use the example in Figure 1 to show the relationship among these concepts. Note that the average revenue curve indicates the demand curve as well, and the demand curve is negatively sloped because of the marginal revenue curve. Many students have trouble understanding marginal revenue. Consider showing the extra revenue from the sale of one more good minus the lost revenue from a lower price for the product.
   
   

2. How Does a Firm Learn About Its Demand?
Demand needs to be estimated by businesses to supply a sufficient amount of goods and services and to determine prices. Surveys, focus groups, market tests, and inventory control systems provide means of estimating demand.

Teaching Strategy: Make sure to go over the examples below to strengthen the understanding of students concerning how firms estimate demand.

1. Example: demand for auto safety
   
   
2. Example: demand for oranges
   
   
3. Example: location
   
   

3. Knowing the Consumer

1. The price elasticity of demand is the percentage change in the quantity demanded of a product divided by the percentage change in the price of the product, ceteris paribus.
   
   Teaching Strategy: Exemplify elastic and inelastic demand with common purchases, such as new cars and medicine, respectively. Stress that the price elasticity for a new car is well above the value of 1, while that of medicine is close to zero.
   
   Teaching Strategy: Explain why, when measuring the price sensitivity of demand (or any other type of elasticity), a relative measure of sensitivity is preferred to an absolute measure.
   
   

• Price elasticity and shape of the demand curve: A perfectly elastic demand curve is a horizontal line; a perfectly inelastic demand curve is a vertical line.
  
  

Teaching Strategy: Make sure the students understand that there is a difference between the slope of a demand curve and the elasticity of demand.

Teaching Strategy: Use the example of a farmers market or a flea market with many sellers of identical products for elastic demand. Use the example of the demand for insulin for a perfectly inelastic demand curve.

Teaching Strategy: List a series of price/quantity demanded levels, draw the respective demand curve, and compute the price elasticity values at each price level.

1. Price elasticity and revenue: Whether a reduction in price leads to increased revenues depends on the price elasticity of demand.
   
   Teaching Strategy: Use a simple arithmetic example of how TR is negatively related to price changes when price elasticity is elastic and positively related to price changes when price elasticity is inelastic. As an example discuss how Delta Airlines lowers its fares on weekends and raises its fares during the week, increasing revenue in both cases.
   
   

• Price discrimination: If different groups of customers have different price elasticities of demand for the same product, and the groups can be segmented, the supplier can increase total revenue by charging each group a different pricea high price where demand is inelastic and a low price where demand is elastic.
  
  

Teaching Strategy: Discuss how movie theaters practice price discrimination when they discount tickets to senior citizens. Also, how movie theaters are the first business to consider you an adult (often at age 12!).

1. Determinants of the price elasticity of demand
   
   

• The existence of substitutes: The more substitutes there are for a product, the greater is the price elasticity of demand.
  
  

Teaching Strategy: Contrast the demand for gasoline with the demand for candy bars. Center the discussion on the fact that no substitutes are available for gasoline and many substitutes are available for candy bars. Explain how the price elasticity of demand differs for the two products.

• The importance of the product in the consumers total budget: The greater the portion of the consumers budget a good constitutes, the more elastic the demand for the good.
  
  

Teaching Strategy: Contrast the demand for housing with the demand for candy bars.

• The time period under consideration: The longer the time period under consideration, the more elastic the demand for the product.
  
  

Teaching Strategy: Show how the demand for petroleum can change over time as nuclear energy and solar energy are developed.

• Consider also the distinction between necessity goods and luxury goods. Of course, one persons necessity can be another persons luxury.
  
  

4. Whats to Come?