Elasticity

Price elasticity of demand

(the mid-point method)

Elasticity

Price elasticity of demand

Proportionate (or %) QD

Proportionate (or %) P

÷

Price elasticity of demand

Proportionate (or %) QD

Proportionate (or %) P

QD

QD

P

P

÷

Price elasticity of demand

Proportionate (or %) QD

Proportionate (or %) P

QD

QD

P

P

÷QD

mid QD

P

mid P

Price (£)

Quantity

Price elasticity of demand

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

Price Quantity

12 010 10 8 20 6 30 4 40 2 50 0 60

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

Price Quantity

12 010 10 8 20 6 30 4 40 2 50 0 60

a

b

Price elasticity of demand

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

Price Quantity

12 010 10 8 20 6 30 4 40 2 50 0 60

a

b

Mid P = 9

P = 2

Mid QD = 15

QD = 10

Price elasticity of demand

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

a

b

Mid P = 9

Mid QD = 15

P = 2

QD = 10

d = ÷QD

mid QD

P

mid P

d = ÷10

15

9

d = 3 (elastic)

Price elasticity of demand

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

a

b

Mid QD = 45

QD = 10

P = 2

Mid P = 3

Price Quantity

12 010 10 8 20 6 30 4 40 2 50 0 60

Price elasticity of demand

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

a

b

Mid QD = 45

QD = 10

d = ÷QD

mid QD

P

mid P

d = ÷10

45

3

d = 1/3 (inelastic)

P = 2

Mid P = 3

Price elasticity of demand

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

a

b

Mid QD = 30

QD = 20

P = 4

Price Quantity

12 010 10 8 20 6 30 4 40 2 50 0 60Mid P = 6

c

Price elasticity of demand

Price (£)

Quantity

12

10

8

6

4

2

00 10 20 30 40 50 60 70

D

a

b

Mid QD = 30

QD = 20

P = 4

Mid P = 6

c

d = ÷QD

mid QD

P

mid P

d = ÷20

30

6

d = 1 (unit elastic)

Price elasticity of demand

Demand andConsumer Expenditure

Elasticity

Price (£)

Quantity

Demand and Consumer Expenditure

60

50

40

30

20

10

00 10 20 30 40 50 60 70

D1

a

Price (£)

Quantity

60

50

40

30

20

10

00 10 20 30 40 50 60 70

£30 x 20£30 x 20= £600= £600

Demand and Consumer Expenditure

D1

b

a

Price (£)

Quantity

60

50

40

30

£20 x 60 = £1,200£20 x 60 = £1,200

20

10

00 10 20 30 40 50 60 70

Demand and Consumer Expenditure

D1

Price (£)

Quantity

60

50

40

30

20

10

00 10 20 30 40 50 60 70

£30 x 20£30 x 20= £600= £600

D2

Demand and Consumer Expenditure

D1

a

c

Price (£)

Quantity

60

50

40

30

20

10

00 10

£10 x 30 = £300£10 x 30 = £300

20 30 40 50 60 70

D2

Demand and Consumer Expenditure

D1

a

Curves with variouselasticities

Elasticity

Totally inelastic demand (Totally inelastic demand (PPDD = 0)= 0)

P

QO Q1

P1

D

a

P

QO Q1

P1

P2

D

b

a

Totally inelastic demand (Totally inelastic demand (PPDD = 0)= 0)

Infinitely elastic demand (Infinitely elastic demand (PPDD = = ))

P

QO Q1

P1 Da

P

QO Q1

P1

Q2

Dba

Infinitely elastic demand (Infinitely elastic demand (PPDD = = ))

Unit elastic demand (Unit elastic demand (PPDD = -1)= -1)

P

QO 40

20

D

a

P

QO 40

20

100

D8

a

b

Unit elastic demand (Unit elastic demand (PPDD = -1)= -1)

As price changes, totalconsumer expenditure

(i.e. firms’ revenue)remains the same.

Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve

P

QO

P1

Q1

a

D

Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve

P

QO

P1

P2

Q1 Q2

a

b

D

Elasticdemand

Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve

P

QO

P1

P2

P3

Q1 Q2Q3

a

b

c

D

Inelasticdemand

Measuring elasticity

by the point method

Elasticity

Measuring elasticity at a pointMeasuring elasticity at a point

P

Q

0

D

r

Pd = (1 / slope) x P/Q

P

Q

50

30

0 40 100

D

r

Pd = (1 / slope) x P/Q

Measuring elasticity at a pointMeasuring elasticity at a point

P

Q

50

30

0 40 100

D

r

Pd = (1 / slope) x P/Q

= 100/50 x 30/40

Measuring elasticity at a pointMeasuring elasticity at a point

P

Q

50

30

0 40 100

D

r

Pd = (1 / slope) x P/Q

= 100/50 x 30/40

= 60/40

Measuring elasticity at a pointMeasuring elasticity at a point

P

Q

50

30

0 40 100

D

r

Pd = (1 / slope) x P/Q

= 100/50 x 30/40

= 60/40

= 1.5

Measuring elasticity at a pointMeasuring elasticity at a point

Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve

P

Q

Demand

0

2

4

6

8

10

0 10 20 30 40 50

n

m

l

k

Pd = (1 / slope) x P/Q

Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve

P

Q

Demand

0

2

4

6

8

10

0 10 20 30 40 50

n

m

l

k

Pd = (1 / slope) x P/Q

(1 / slope) is constant

= 50/10 = 5

Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve

P

Q

Demand

0

2

4

6

8

10

0 10 20 30 40 50

n

m

l

k

Pd = (1 / slope) x P/Q

(1 / slope) is constant

= 50/10 = 5But P/Q varies:

at n, P/Q = 8/10

Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve

P

Q

Demand

0

2

4

6

8

10

0 10 20 30 40 50

n

m

l

k

Pd = (1 / slope) x P/Q

(1 / slope) is constant

= 50/10 = 5But P/Q varies:

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

Price elasticity of supply

Elasticity

Proportionate (or %) QD

Proportionate (or %) P

The mid-point formula formeasuring price elasticity of supply

÷

Proportionate (or %) QD

Proportionate (or %) P

QD

QD

P

P

The mid-point formula formeasuring price elasticity of supply

÷

Proportionate (or %) QD

Proportionate (or %) P

QD

QD

P

P

÷QD

mid QD

P

mid P

The mid-point formula formeasuring price elasticity of supply

Supply curves with different price elasticity of supplySupply curves with different price elasticity of supplyP

Q O

P0

Q0

S1

Supply curves with different price elasticity of supplySupply curves with different price elasticity of supplyP

Q O

P0

Q0

S2

S1

Supply curves with different price elasticity of supplySupply curves with different price elasticity of supplyP

Q O

P1

P0

Q0 Q1

S2

S1

Supply curves with different price elasticity of supplySupply curves with different price elasticity of supplyP

Q O

P1

Q2

P0

Q0 Q1

S2

S1

Price elasticity of supply

and time

Elasticity

Supply in different time periodsSupply in different time periods

D1

P1

Q1

P

Q O

a

D1

D2

P1

Q1

P

Q O

a

Supply in different time periodsSupply in different time periods

D1

D2

Si

P1

P2

Q1

P

Q O

a

b

Supply in different time periodsSupply in different time periods

D1

D2

Si SS

P1

P3

P2

Q1 Q3

P

Q O

a

b

c

Supply in different time periodsSupply in different time periods

D1

D2

Si SS

SL

P1

P4

P3

P2

Q1 Q3 Q4

P

Q O

a

b

c

d

Supply in different time periodsSupply in different time periods