Elasticity Elasticity Price elasticity of demand introduction Market

Elasticity

Elasticity Price elasticity of demand: introduction

Market supply and demand Price S 1 a P 1 D O Q 1 Quantity

Market supply and demand S 2 S 1 Price b P 2 a P 1 D O Q 2 Q 1 Quantity

Market supply and demand S 2 S 1 Price b P 2 a D' P 1 D O Q 2 Q 1 Quantity

Market supply and demand S 2 S 1 Price b P 2 c P 3 a D' P 1 D O Q 3 Q 2 Q 1 Quantity

Elasticity Measuring price elasticity 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 QD ÷ DP P

Price elasticity of demand Proportionate (or %) DQD Proportionate (or %) DP DQD QD DQD mid QD ÷ ÷ DP P DP mid P

Price elasticity of demand Price (£) 12 10 8 6 Price Quantity 12 10 8 6 4 2 0 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 a 10 b 8 6 Price Quantity 12 10 8 6 4 2 0 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 (£) Mid P = 9 12 a 10 DP = -2 b 8 6 DQD = 10 Price Quantity 12 10 8 6 4 2 0 0 10 20 30 40 50 60 4 2 0 Mid QD = 15 0 10 20 30 40 D 50 60 70 Quantity

Price elasticity of demand Price (£) Mid P = 9 12 a 10 d = DP = -2 d = b 8 d = 6 DQD mid QD 10 15 -3 ÷ DP ÷ mid P -2 9 (elastic) DQD = 10 4 2 0 Mid QD = 15 0 10 20 30 40 D 50 60 70 Quantity

Price elasticity of demand Price (£) 12 10 8 6 Mid P = 3 a 4 DP = -2 Quantity 12 10 8 6 4 2 0 0 10 20 30 40 50 60 b 2 0 Price DQD = 10 0 10 20 30 40 D 50 Mid QD = 45 60 70 Quantity

Price elasticity of demand Price (£) d = 12 10 d = 8 d = 6 Mid P = 3 mid QD 10 45 -1/3 DP = -2 DQD = 10 10 ÷ mid P -2 3 (inelastic) b 2 0 ÷ DP a 4 0 DQD 20 30 40 D 50 Mid QD = 45 60 70 Quantity

Price elasticity of demand Price (£) 12 10 a 8 DP = -4 c 6 Mid P = 6 b 4 Price Quantity 12 10 8 6 4 2 0 0 10 20 30 40 50 60 DQD = 20 2 D 0 0 10 20 30 Mid QD = 30 40 50 60 70 Quantity

Price elasticity of demand Price (£) d = 12 10 d = a 8 DP = -4 c 6 Mid P = 6 d = DQD mid QD 20 30 -1 ÷ ÷ DP mid P -4 6 (unit elastic) b 4 DQD = 20 2 D 0 0 10 20 30 Mid QD = 30 40 50 60 70 Quantity

Elasticity Demand consumer expenditure

Total expenditure P(£) D Q (millions of units period of time)

Total expenditure P(£) D Q (millions of units period of time)

Total expenditure P(£) Consumers’ total expenditure = firms’ total revenue = £ 2 x 3 m = £ 6 m Q (millions of units period of time) D

Elasticity Price elasticity of demand consumer expenditure

Elastic demand between two points P(£) 4 0 a D 20 Q (millions of units period of time)

Elastic demand between two points Expenditure falls as price rises P(£) 5 b a 4 0 D 10 20 Q (millions of units period of time)

Inelastic demand between two points P(£) 4 a D 0 20 Q (millions of units period of time)

Inelastic demand between two points Expenditure rises as price rises 8 c P(£) a 4 D 0 15 20 Q (millions of units period of time)

Elasticity Demand curves with various elasticities

P Totally inelastic demand (P D = 0) D a P 1 O Q 1 Q

P Totally inelastic demand (P D = 0) D P 2 b P 1 a O Q 1 Q

P Infinitely elastic demand (P D = ) a P 1 O Q 1 D Q

P Infinitely elastic demand (P D = ) a b Q 1 Q 2 P 1 O D Q

P 20 Unitary elastic demand (P D = – 1) a D O 40 Q

P 20 Unitary elastic demand (P D = – 1) a b 8 O As price changes, total consumer expenditure (i. e. firms’ revenue) remains the same. D 40 100 Q

Different elasticities along different portions of a demand curve P a P 1 D O Q 1 Q

Different elasticities along different portions of a demand curve P a P 1 Elastic demand b P 2 D O Q 1 Q 2 Q

Different elasticities along different portions of a demand curve P a P 1 b P 2 Inelastic demand c P 3 O D Q 1 Q 2 Q 3 Q

Elasticity Measuring elasticity by the point method

Measuring elasticity at a point Ped = (1 / slope) x P/Q r P D 0 Q

Measuring elasticity at a point 50 30 Ped = (1 / slope) x P/Q r P D 0 100 40 Q

Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q = 30 -100/50 x 30/40 r P D 0 100 40 Q

Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q = = 30 -100/50 x 30/40 -60/40 r P D 0 100 40 Q

Measuring elasticity at a point 50 30 Ped = (1 / slope) x P/Q = = = r -100/50 x 30/40 -60/40 -1. 5 P D 0 100 40 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 n (1 / slope) is constant = -50/10 = -5 m P l Demand k Q

Different elasticities along a straight-line demand curve Ped = (1 / slope) x P/Q n (1 / slope) is constant = -50/10 = -5 m But P/Q varies: at n, P/Q = 8/10 P l Demand k Q

Different elasticities along a straight-line demand curve Ped = (1 / slope) x P/Q n (1 / slope) is constant = -50/10 = -5 m But P/Q varies: at n, P/Q = 8/10 at m, P/Q = 6/20 atl l, P/Q = 4/30 P l Demand k Q

Elasticity Price elasticity of supply

The mid-point formula for measuring 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 DQS QS ÷ DP P

The mid-point formula for measuring price elasticity of supply Proportionate (or %) DQS Proportionate (or %) DP DQS QS DQS mid QS ÷ ÷ DP P DP mid P

Supply curves with different price elasticity of supply P S 1 P 0 O Q 0 Q

Supply curves with different price elasticity of supply P S 1 S 2 P 0 O Q 0 Q

Supply curves with different price elasticity of supply P S 1 S 2 P 1 P 0 O Q 0 Q 1 Q

Supply curves with different price elasticity of supply P S 1 S 2 P 1 P 0 O Q 0 Q 1 Q 2 Q

Elasticity Price elasticity of supply and time

Supply in different time periods P P 1 a D 1 O Q 1 Q

Supply in different time periods P P 1 a D 2 D 1 O Q 1 Q

Supply in different time periods P P 2 Si b P 1 a D 2 D 1 O Q 1 Q

Supply in different time periods P P 2 Si SS b c P 3 P 1 a D 2 D 1 O Q 1 Q 3 Q

Supply in different time periods P P 2 Si SS b c P 3 SL d P 4 P 1 a D 2 D 1 O Q 1 Q 3 Q 4 Q