Chapter Five: Elasticity

The Price Elasticity of Demand

Table 5.1: Relationship Between Price and Quantity Demanded for Braeburn’s Poetry Book

Figure 5.1: Demand Curve for Braeburn’s Poetry Book We can use a demand curve to calculate the price elasticity of demand.

Figure 5.2: Perfectly Inelastic Demand and Perfectly Elastic Demand When the quantity demanded is constant regardless of price, demand is perfectly inelastic. When even a small increase in price will reduce the quantity demanded to zero, demand is perfectly elastic.

Figure 5.3: Elasticity Varies Along a Straight-Line Demand Curve Above point A demand is elastic but below point A demand is inelastic.

Figure 5.4: Changing the Scale of Braeburn’s Demand Curve We cannot make conclusions about elasticity simply by looking at a demand curve. By changing the scale of the axes we can make a demand curve “look” more or less elastic.

Figure 5.5: Braeburn’s Book Revenues Braeburn’s book revenues equal areas A+B at a price of $5 per book. Revenues equal areas A+C at a price of $10 per book.

Table 5.2: Effects of Price Changes on Revenues

Table 5.3: Some Estimated Price Elasticities of Demand

The Price Elasticity of Supply

Figure 5.6: Price Elasticity of Supply Supply curve Se is more elastic than supply curve Si. Thus with supply curve Se a company can entice their supply to increase the quantity supplied to Q1 with a smaller price increase.

Income Elasticity of Demand

Figure 5.7: Income Elasticity of Demand An increase in income shifts the demand curve outward (to the right). The greater the income elasticity of demand, the greater the shift.