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© 2007 Thomson South-Western
© 2007 Thomson South-Western
Elasticity . . .
(1 0 8 )
100 20%
10 2
( 2 .2 0 2 .0 0 )
100 10%
2 .0 0
• Perfectly Inelastic
• Quantity demanded does not respond to price
changes.
• Perfectly Elastic
• Quantity demanded changes infinitely with any
change in price.
• Unit Elastic
• Quantity demanded changes by the same percentage
as the price.
Price
Demand
$5
4
1. An
increase
in price . . .
0 100 Quantity
Price
$5
4
1. A 25% Demand
increase
in price . . .
0 90 100 Quantity
$5
4
1. A 25% Demand
increase
in price . . .
0 75 100 Quantity
$5
4 Demand
1. A 25%
increase
in price . . .
0 50 100 Quantity
1. At any price
above $4, quantity
demanded is zero.
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
0 Quantity
3. At a price below $4,
quantity demanded is infinite.
• Determination of Price
• Basis of Price Discrimination
• Determination of Rewards of Factor of
Production
• Government Policies of Taxation
TR P Q
$4
P × Q = $400
P
(revenue) Demand
0 100 Quantity
Price Price
An Increase in price from $1 … leads to an Increase in
to $3 … total revenue from $100 to
$240
$3
Revenue = $240
$1
Revenue = $100 Demand Demand
Price Price
$5
$4
Demand
Demand
0 50 Quantity 0 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
Elasticity and Revenue: Example
P e rc e n ta g e c h a n g e
in q u a n tity d e m a n d e d
In c o m e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e
in in c o m e
• Income Elasticity
• Types of Goods
• Normal Goods
• Inferior Goods
• Higher income raises the quantity demanded for
normal goods but lowers the quantity demanded for
inferior goods.
Price
Supply
$5
4
1. An
increase
in price . . .
0 100 Quantity
Price
Supply
$5
4
1. A 25%
increase
in price . . .
Supply
$5
Supply
$5
4
1. A 25%
increase
in price . . .
1. At any price
above $4, quantity
supplied is infinite.
$4 Supply
2. At exactly $4,
producers will
supply any quantity.
0 Quantity
3. At a price below $4,
quantity supplied is zero.
$3
Demand
100 110
(1 0 0 1 1 0 ) / 2
E
D
3 .0 0 2 .0 0
( 3 .0 0 2 .0 0 ) / 2
0 .0 9 5
0 .2 4
0 .4
Demand is inelastic.
© 2007 Thomson South-Western
Does Drug Interdiction Increase or
Decrease Drug-Related Crime?
• Drug interdiction impacts sellers rather than
buyers.
• Demand is unchanged.
• Equilibrium price rises although quantity falls.
• Drug education impacts the buyers rather than
sellers.
• Demand is shifted.
• Equilibrium price and quantity are lowered.
S1 S1
It is amazing how
useful knowledge
of elasticities can
be!
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D1
D2