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(10 8)
100
20%
10
2
(2.20 2.00)
10%
100
2.00
(Q2 Q1 ) /[(Q2 Q1 ) / 2]
( P2 P1 ) /[( P2 P1 ) / 2]
2.32
(2.20 2.00) 9.5%
(2.00 2.20)/ 2
Elastic Demand
ED
Price
$5
Demand
50
100 Quantity
(100 50)
(4.00 5.00)
(100 50)/2
(4.00 5.00)/2
67 percent
3
22 percent
Perfectly Inelastic
Perfectly Elastic
Unit Elastic
Price
Demand
$5
1. An
increase
in price . . .
100
Quantity
Price
$5
$5
1. A 22%
increase
in price . . .
Price
1. A 22%
increase
in price . . .
Demand
90
100
Quantity
Demand
80
100
Quantity
Price
Price
$5
1. A 22%
increase
in price . . .
Demand
$4
Demand
2. At exactly $4,
consumers will
buy any quantity.
0
50
100
Quantity
Quantity
0
3. At a price below $4,
quantity demanded is infinite.
Price
$4
P Q = $400
(revenue)
0
2007 Thomson South-Western
Demand
100
Quantity
2007 Thomson South-Western
Price
leads to an Increase in
total revenue from $100 to
$240
$3
$1
Revenue = $240
Demand
Revenue = $100
100
Quantity
Demand
0
80
Price
leads to an decrease in
total revenue from $200 to
$100
$5
$4
Revenue = $200
Quantity
50
Demand
Demand
Revenue = $100
Quantity
20
Quantity
Note that with each price increase, the Law of Demand still holds an
increase in price leads to a decrease in the quantity demanded. It is the
change in TR that varies!
2007 Thomson South-Western
Price
$7
6
5
4
Elasticity
is is<inelastic;
1 in this
range.
Demand
demand
is
3
2
1
0
10
12
14
Quantity
Income Elasticity
Income Elasticity
Types of Goods
Normal Goods
Inferior Goods
Price
Supply
$5
1. An
increase
in price . . .
Price
Supply
$5
1. A 22%
increase
in price . . .
100
Quantity
100
110
Quantity
Supply
$5
1. A 22%
increase
in price . . .
100
125
Quantity
Supply
$5
1. A 22%
increase
in price . . .
100
200
Quantity
Price
$4
1. At any price
above $4, quantity
supplied is infinite.
Time period
Supply
2. At exactly $4,
producers will
supply any quantity.
0
3. At a price below $4,
quantity supplied is zero.
Quantity
Percentage change
in quantity supplied
Percentage change in price
10
2. . . . leads
to a large fall
in price . . .
$3
S2
Demand
0
100
110
Quantity of
Wheat
100 110
(100 110) / 2
ED
3.00 2.00
(3.00 2.00) / 2
In the short run, both supply and demand for oil are
relatively inelastic
But in the long run, both are elastic
0.095
0.24
0.4
Demand is inelastic.
2007 Thomson South-Western
11
Drug Education
Drug Interdiction
Price of Drugs
Price of Drugs
S2
It is amazing how
useful knowledge
of elasticities can
be!
D1
Quantity of Drugs
D2
D1
Quantity of Drugs
Summary
S1
S1
Summary
12
Summary
In most markets, supply is more elastic in the
long run than in the short run.
The price elasticity of supply is calculated as
the percentage change in quantity supplied
divided by the percentage change in price.
The tools of supply and demand can be applied
in many different types of markets.
13