Elasticity
Price elasticity of demand: introduction
Market supply and demand Price a P1 D O Q1 Quantity
Market supply and demand b P2 Price a P1 D O Q2 Q1 Quantity
Market supply and demand b P2 Price a P1 D' D O Q2 Q1 Quantity
Market supply and demand b P2 Price c P3 a P1 D' D O Q3 Q2 Q1 Quantity
Measuring price elasticity (the mid-point method) of demand (the mid-point method)
Price elasticity of demand Proportionate (or %) DQD Proportionate (or %) DP
÷ Price elasticity of demand Proportionate (or %) DQD Proportionate (or %) DP DQD DP ÷ QD P
÷ ÷ Price elasticity of demand Proportionate (or %) DQD Proportionate (or %) DP DQD DP ÷ QD P DQD DP ÷ mid QD mid P
Price elasticity of demand Price Quantity 12 12 0 10 10 8 20 6 30 4 40 2 50 0 60 10 8 6 4 2 D 10 20 30 40 50 60 70 Quantity
Price elasticity of demand Price Quantity 12 12 0 10 10 8 20 6 30 4 40 2 50 0 60 a 10 b 8 6 4 2 D 10 20 30 40 50 60 70 Quantity
Price elasticity of demand Price Quantity Mid P = 9 12 12 0 10 10 8 20 6 30 4 40 2 50 0 60 a DP = -2 10 b 8 6 DQD = 10 4 2 Mid QD = 15 D 10 20 30 40 50 60 70 Quantity
Price elasticity of demand DQD DP Mid P = 9 ed = 12 ÷ mid QD mid P a DP = -2 10 10 -2 ed = ÷ b 15 9 8 ed = -3 (elastic) 6 DQD = 10 4 2 Mid QD = 15 D 10 20 30 40 50 60 70 Quantity
Price elasticity of demand Price Quantity 12 12 0 10 10 8 20 6 30 4 40 2 50 0 60 10 8 6 Mid P = 3 a 4 DP = -2 b 2 DQD = 10 D 10 20 30 40 50 60 70 Mid QD = 45 Quantity
Price elasticity of demand DQD DP ed = 12 ÷ mid QD mid P 10 10 -2 ed = ÷ 45 3 8 ed = -1/3 (inelastic) 6 Mid P = 3 a 4 DP = -2 b 2 DQD = 10 D 10 20 30 40 50 60 70 Mid QD = 45 Quantity
Price elasticity of demand Price Quantity 12 12 0 10 10 8 20 6 30 4 40 2 50 0 60 10 a 8 DP = -4 c 6 Mid P = 6 b 4 DQD = 20 2 D 10 20 30 40 50 60 70 Mid QD = 30 Quantity
Price elasticity of demand DQD DP ed = 12 ÷ mid QD mid P 20 -4 10 ed = ÷ 30 6 a 8 ed = -1 (unit elastic) DP = -4 c 6 Mid P = 6 b 4 DQD = 20 2 D 10 20 30 40 50 60 70 Mid QD = 30 Quantity
Demand and consumer expenditure Elasticity Demand and consumer expenditure
Q (millions of units per period of time) Total expenditure P(£) D Q (millions of units per period of time)
Q (millions of units per period of time) Total expenditure P(£) D Q (millions of units per period of time)
Total expenditure Consumers’ total expenditure = firms’ total revenue £2 x 3m = £6m D Q (millions of units per period of time)
Price elasticity of demand and consumer expenditure
Elastic demand between two points 4 D 20 Q (millions of units per period of time)
Elastic demand between two points Expenditure falls as price rises P(£) b 5 a 4 D 10 20 Q (millions of units per period of time)
Inelastic demand between two points 4 D 20 Q (millions of units per period of time)
Inelastic demand between two points Expenditure rises as price rises c 8 P(£) a 4 D 15 20 Q (millions of units per period of time)
Demand curves with various elasticities Elasticity Demand curves with various elasticities
Totally inelastic demand (PD = 0) Q1 Q
Totally inelastic demand (PD = 0) b P1 a O Q1 Q
Infinitely elastic demand (PD = ) O Q1 Q
Infinitely elastic demand (PD = ) b P1 D O Q1 Q2 Q
Unitary elastic demand (PD = –1) 20 D O 40 Q
Unitary elastic demand (PD = –1) As price changes, total consumer expenditure (i.e. firms’ revenue) remains the same. a 20 b 8 D O 40 100 Q
Different elasticities along different portions of a demand curve Q1 Q
Different elasticities along different portions of a demand curve b P2 D O Q1 Q2 Q
Different elasticities along different portions of a demand curve b Inelastic demand P2 c P3 D O Q1 Q2 Q3 Q
Measuring elasticity by the point method
Measuring elasticity at a point Ped = (1 / slope) x P/Q r P D Q
Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q r 30 P D 40 100 Q
Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q = -100/50 x 30/40 r 30 P D 40 100 Q
Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q = -100/50 x 30/40 = -60/40 r 30 P D 40 100 Q
Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q = -100/50 x 30/40 = -60/40 = -1.5 r 30 P D 40 100 Q
Different elasticities along a straight-line demand curve Ped = (1 / slope) x P/Q n m P l Demand k Q
Different elasticities along a straight-line demand curve Ped = (1 / slope) x P/Q (1 / slope) is constant = -50/10 = -5 n m P l Demand k Q
Different elasticities along a straight-line demand curve Ped = (1 / slope) x P/Q (1 / slope) is constant = -50/10 = -5 But P/Q varies: at n, P/Q = 8/10 n m P l Demand k Q
Different elasticities along a straight-line demand curve Ped = (1 / slope) x P/Q (1 / slope) is constant = -50/10 = -5 But P/Q varies: at n, P/Q = 8/10 at m, P/Q = 6/20 at l, P/Q = 4/30 n m P l l Demand k Q
Price elasticity of supply
Proportionate (or %) DQS Proportionate (or %) DP The mid-point formula for measuring price elasticity of supply Proportionate (or %) DQS Proportionate (or %) DP
Proportionate (or %) DQS Proportionate (or %) DP The mid-point formula for measuring price elasticity of supply Proportionate (or %) DQS Proportionate (or %) DP DQS DP ÷ QS P
Proportionate (or %) DQS Proportionate (or %) DP The mid-point formula for measuring price elasticity of supply Proportionate (or %) DQS Proportionate (or %) DP DQS DP ÷ QS P DQS DP ÷ mid QS mid P
Supply curves with different price elasticity of supply Q0 Q
Supply curves with different price elasticity of supply Q0 Q
Supply curves with different price elasticity of supply Q0 Q1 Q
Supply curves with different price elasticity of supply Q0 Q1 Q2 Q
Price elasticity of supply and time
Supply in different time periods a D1 O Q1 Q
Supply in different time periods a D2 D1 O Q1 Q
Supply in different time periods Si b P2 P1 a D2 D1 O Q1 Q
Supply in different time periods Si SS b P2 c P3 P1 a D2 D1 O Q1 Q3 Q
Supply in different time periods Si SS b P2 c SL P3 d P4 P1 a D2 D1 O Q1 Q3 Q4 Q