Elasticity

Elasticity

Price elasticity of demand

(the mid-point method)

Price elasticity of demand

Proportionate (or %) QD Proportionate (or %) P

Price elasticity of demand

Proportionate (or %) QD Proportionate (or %) P QD QD P

Price elasticity of demand

Proportionate (or %) QD Proportionate (or %) P QD QD QD mid QD P

P P mid P

Price elasticity of demand

Price ()
12 10 8 6

Price 12 10 8 6 4 2 0

Quantity 0 10 20 30 40 50 60

4 2

D
0 0 10 20 30 40 50 60 70

Quantity

Price elasticity of demand

Price ()
12

Price

Quantity 0 10 20 30 40 50 60

10 8
6

a b

12 10 8 6 4 2 0

4 2

D
0 0

10

20

30

40

50

60

70

Quantity

Price elasticity of demand

Price ()
12

Mid P = 9

Price 12 10 8 6 4 2 0

Quantity 0 10 20 30 40 50 60

10 8
6

P = 2

QD = 10
4 2 0 0

Mid QD = 15
10 20
30 40 50

D
60 70

Quantity

Price elasticity of demand

Price ()
12

Mid P = 9

d = d = d =
QD = 10

QD mid QD 10 15 3 2 9

P mid P

10 8
6

P = 2

(elastic)

4 2 0 0

Mid QD = 15
10 20
30 40 50

D
60 70

Quantity

Price elasticity of demand

Price ()
12 10 8 6

Price 12 10 8 6 4 2 0

Quantity 0 10 20 30 40 50 60

Mid P = 3
4

a
P = 2

b
D
50
60 70

QD = 10
0 0 10 20 30

40

Mid QD = 45

Quantity

Price elasticity of demand

Price ()
12 10

d = d =

QD mid QD 10 45 1/3 2 3

P mid P

8 6

d =
Mid P = 3

(inelastic)

a
P = 2

b
D
50
60 70

QD = 10
0 0 10 20 30

40

Mid QD = 45

Quantity

Price elasticity of demand

Price ()
12 10

Price 12 10 8 6 4 2 0

Quantity 0 10 20 30 40 50 60

a
P = 4

c b
QD = 20

Mid P = 6
4
2

D
0 0 10

20

30

40

50

60

70

Mid QD = 30

Quantity

Price elasticity of demand

Price ()
12 10

d = d =
a
P = 4

QD mid QD 20 30 1 6 4

P mid P

8 6

d =
b

(unit elastic)

Mid P = 6
4
2

QD = 20 D

0 0 10

20

30

40

50

60

70

Mid QD = 30

Quantity

Elasticity

Demand and Consumer Expenditure

Demand and Consumer Expenditure

Price ()
60 50 40 30

20 10 0 0 10 20 30 40 50 60

D1

70

Quantity

Demand and Consumer Expenditure

Price ()
60 50 40 30

20 10 0 0

30 x 20 = 600

D1

10

20

30

40

50

60

70

Quantity

Demand and Consumer Expenditure

Price ()
60 50 40

a
30

b
20 10 0 0 10 20 30 40 50 60 70

D1 20 x 60 = 1,200

Quantity

Demand and Consumer Expenditure

Price ()
60 50 40

a
30

20 10 0 0

30 x 20 = 600 D2
10 20 30 40 50 60

D1

70

Quantity

Demand and Consumer Expenditure

Price ()
60 50 40

a
30

20 10

D1 c 10 x 30 = 300 D2
30 40 50 60 70

0 0 10 20

Quantity

Elasticity

Curves with various elasticities

Totally inelastic demand (PD = 0)

P

P1

Q1

Totally inelastic demand (PD = 0)

P

P2

P1

Q1

Infinitely elastic demand (PD = )

P

a
P1

Q1

Infinitely elastic demand (PD = )

P

a
P1

b D

Q1

Q2

Unit elastic demand (PD = -1)

P

20

D
40

Unit elastic demand (PD = -1)

P

20

As price changes, total consumer expenditure (i.e. firms revenue) remains the same.

b
8

D
40 100

Different elasticities along different portions of a demand curve

P

a
P1

Q1

Different elasticities along different portions of a demand curve

P

a
P1

Elastic demand

b
P2

Q1

Q2

Different elasticities along different portions of a demand curve

P

a
P1

b
P2

Inelastic demand

c
P3

Q1

Q2

Q3

Elasticity

Measuring elasticity by the point method

Measuring elasticity at a point

Pd = (1 / slope) x P/Q

r
P

0 Q

Measuring elasticity at a point

50 Pd = (1 / slope) x P/Q

r
30 P

40 Q

100

Measuring elasticity at a point

50 Pd = (1 / slope) x P/Q = 100/50 x 30/40

r
30 P

40 Q

100

Measuring elasticity at a point

50 Pd = (1 / slope) x P/Q = 100/50 x 30/40 = 60/40

r
30 P

40 Q

100

Measuring elasticity at a point

50 Pd = (1 / slope) x P/Q = 100/50 x 30/40 = 60/40 = 1.5

r
30 P

40 Q

100

Different elasticities along a straight-line demand curve

10

n
8

Pd = (1 / slope) x P/Q

m
6

l
4

Demand
2

0 0 10 20 30 40 50

Different elasticities along a straight-line demand curve

10

n
8

Pd = (1 / slope) x P/Q (1 / slope) is constant = 50/10 = 5

m
6

l
4

Demand
2

0 0 10 20 30 40 50

Different elasticities along a straight-line demand curve

10

n
8

Pd = (1 / slope) x P/Q (1 / slope) is constant = 50/10 = 5

m
6

But P/Q varies: at n, P/Q = 8/10

l
4

Demand
2

0 0 10 20 30 40 50

Different elasticities along a straight-line demand curve

10

n
8

Pd = (1 / slope) x P/Q (1 / slope) is constant = 50/10 = 5

m
6

But P/Q varies: at n, P/Q = 8/10 at m, P/Q = 6/20 at l l, P/Q = 4/30

P
4

Demand
2

0 0 10 20 30 40 50

Elasticity

Price elasticity of supply

The mid-point formula for measuring price elasticity of supply

Proportionate (or %) QD Proportionate (or %) P

The mid-point formula for measuring price elasticity of supply

Proportionate (or %) QD Proportionate (or %) P QD QD P

The mid-point formula for measuring price elasticity of supply

Proportionate (or %) QD Proportionate (or %) P QD QD QD mid QD P

P P mid P

Supply curves with different price elasticity of supply

P S1

P0

Q0

Supply curves with different price elasticity of supply

P S1 S2

P0

Q0

Supply curves with different price elasticity of supply

P S1 S2

P1

P0

Q0

Q1

Supply curves with different price elasticity of supply

P S1 S2

P1

P0

Q0

Q1

Q2

Elasticity

Price elasticity of supply and time

Supply in different time periods

P

P1

D1 O Q1 Q

Supply in different time periods

P

P1

D2 D1 O Q1 Q

Supply in different time periods

P Si

P2

P1

D2 D1 O Q1 Q

Supply in different time periods

P Si SS

P2 P3 P1

b c

D2 D1 O Q1 Q3 Q

Supply in different time periods

P Si SS

P2 P3 P4 P1

b c d a
SL

D2 D1 O Q1 Q3 Q4 Q