Elasticity of Demand and Supply

Elasticity

Price elasticity of demand Introduction

Market supply and demand

S1

Price

a
P1

D
O Q1 Quantity

Market supply and demand

S2 S1 b
Price
P2

a
P1

D
O Q2 Q1 Quantity

Market supply and demand

S2 S1 b
Price
P2

a
P1

D'

D
O Q2 Q1 Quantity

Market supply and demand

S2 S1 b
Price
P2

c
P3 P1

a D'

D
O Q3 Q2 Q1 Quantity

Elasticity

Measuring price elasticity of demand

(The mid-point method)

Price elasticity of demand

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

P P P mid P

Measuring elasticity using the arc method

10

m
8

n
P () 6

Demand
2
Q (000s)

Measuring elasticity using the arc method

10
P
d

Q
mid Q

m 7 P = 2
P () 6

mid P

n Q = 10

Mid P

Demand
2

15 Mid Q

Q (000s)

Measuring elasticity using the arc method

10
P
d

= =

Q
mid Q 10 15

m 7 P = 2
P () 6

mid P
2 7

n Q = 10

Mid P

Demand
2

15 Mid Q

Q (000s)

Measuring elasticity using the arc method

10
P
d

= =

Q
mid Q 10 15

m 7 P = 2
P () 6

mid P
2 7

n Q = 10

10/15 x 7/2

Mid P

Demand
2

15 Mid Q

Q (000s)

Measuring elasticity using the arc method

10
P
d

= =

Q
mid Q 10 15

m 7 P = 2
P () 6

mid P
2 7

n Q = 10

= =

10/15 x 7/2 70/30

Mid P

Demand
2

15 Mid Q

Q (000s)

Measuring elasticity using the arc method

10
P
d

= =

Q
mid Q 10 15

m 7 P = 2
P () 6

mid P
2 7

n Q = 10

= = =

10/15 x 7/2 70/30 7/3 = 2.33

Mid P

Demand
2

15 Mid Q

Q (000s)

Elasticity

Demand and consumer expenditure

Total expenditure
4

P()

2 Consumers total expenditure

= firms total revenue = 2 x 3m = 6m

Q (millions of units per period of time)

Elasticity

Price elasticity of demand and consumer expenditure

Elastic demand between two points

Expenditure falls as price rises
P() 5 4

b a D

10

20

Q (millions of units per period of time)

Inelastic demand between two points

Expenditure rises as price rises
8 P()

D
0 15 20

Q (millions of units per period of time)

Elasticity

Demand curves with various elasticities

Totally inelastic demand (P

D

= 0)

P2

P1

Q1

Infinitely elastic demand (P

= )

a
P1

Q1

Q2

Unit elastic demand (P

= 1)

20

b 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

Price elasticity of supply

Measuring price elasticity of supply

Proportionate (or %) QS Proportionate (or %) P QS QS QS mid QS

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 b

P2

P1

D2 D1
O Q1 Q

Supply in different time periods

P

Si b c

SS

P2 P3 P1

D2 D1
O Q1 Q3 Q

Supply in different time periods

P

Si b c d a

SS

P2 P3 P4 P1

SL

D2 D1
O Q1 Q3 Q4 Q