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Supply
dQ P
Eld *
dP Q
(Q0 Q1 ) (Q0 Q1 )
OR we can rewrite it ( P0 P1 ) ( P0 P1 )
as follows
Q 140 2 P1 15P1
d 2
Suppose Demand and Supply
function then find equilibrium
price and quantity Q 114 2.5P1
s
E<1
• Relatively inelastic:
A percent increase in price results Demand for
Less elastic
in a smaller % reduction in sales.
The demand for less elastic has
been estimated to be highly
inelastic or less elastic.
Quantity
(b)
Quantity
(e)
Ed = 1
5
4
3 Ed < 1
2
1 Ed = 0
0 1 2 3 4 5 6 7 8 9 10 Quantity
$1.50 $1.50
$1.00 $1.00
D
D
25 100 90 100
(a) Ballpoint pens per week (in thousands) (b) Cigarette packs per week (in millions)
• As the price of ballpoint pens (a) rises from $1.00 to $1.50 . . . the
quantity demanded plunges from 100,000 to 25,000 per week.
• The % reduction in quantity demanded is larger than the % increase in
price, hence the demand for ballpoint pens is relatively elastic.
• As the price of cigarettes (b) rises from $1.00 to $1.50 . . . quantity
demanded plunges from 100 million to 90 million packs per week.
• The % reduction in quantity demanded is smaller than the % increase
in price, hence the demand for cigarettes is relatively inelastic.
Copyright 2003 South-Western
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Income Elasticity of Demand
p a
b
Qd
dQ P1 P2
E=
dP Q1 Q2
Quantity Total
Price sold revenue Elasticity
Price
$9 x 0 = $0
17.00 Total
$9
$8 x 1 = $8
5.00 revenue
$8
$7 x 2 = $14
2.60 $20
$7 $6 x 3 = $18
1.57
$6 $5 x 4 = $20
1.00 $15
$5 $4 x 5 = $20
.64
$4 $3 x 6 = $18
.38 $10
$3 $2 x 7 = $14
.20
$2 $1 x 8 = $8
.06 $5
$1 $0 x 9 = $0
$0 Total Qty
revenue $0
$0 $5 $10 $15 $20 0 1 2 3 4 5 6 7 8 9
(c) Price versus Total Revenue (d) Quantity versus Total Revenue
• Consumer Surplus:
the area below the demand curve but above the
actual price paid.
Quantity
5 10 15 20 25 30 (millions of
subscribers)