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Chapter 3
Supply,
Demand,
and
Elasticity
Introduction to Economics (Combined Version) 5th Edition
The Demand Curve
 The price elasticity of
demand is the ratio of the
percentage change in the
quantity of a good demanded
to a given percentage change
in its price.
 The midpoint formula for
calculating price elasticity of
demand is as follows:
Introduction to Economics (Combined Version) 5th Edition
Elastic and Inelastic Demand
 The relationship between price and revenue along a given
demand curve depends on whether demand is elastic, inelastic,
or unit elastic.
Introduction to Economics (Combined Version) 5th Edition
Changes in Elasticity
 Elasticity of demand changes along a straight-line demand curve as
shown in part a of the diagram.
 A constant-elasticity demand curve has the shape shown in part b of
the diagram.
Introduction to Economics (Combined Version) 5th Edition
Income Elasticity of Demand
 Income elasticity of demand is the percentage change in
quantity demand associated with a given percentage change
in income.
 It is calculated using the formula shown below.
 Income elasticity of demand is positive for a normal good
and negative for an inferior good.
Introduction to Economics (Combined Version) 5th Edition
Examples of Price Elasticity of Supply
 Price elasticity of supply, like price-elasticity of demand, is
calculated using the midpoint formula, as in these examples.
Introduction to Economics (Combined Version) 5th Edition
Effect of Prohibition on Market for DDT
Suppose that supply and
demand for DDT are elastic,
and that use of DDT is
prohibited.
 If the prohibition is
strongly enforced, the
supply curve will shift to
S3, and revenue from sale
of DDT will fall to zero.
 If the prohibition is weakly
enforced (S2), some DDT
will be sold but revenue
will decrease.
Supply and Demand for DDT
Strong prohibition
Weak prohibition
Legal supply
Introduction to Economics (Combined Version) 5th Edition
Effect of Prohibition on Market
for Cocaine
Suppose the demand for cocaine is
inelastic.
 Sale of cocaine is prohibited, but
the prohibition is not completely
effective, shifting the supply
curve from S1 to S2 .
 As a result of prohibition, the
total revenue from cocaine
increases (PXQ at E2 compared
with PXQ at E1).
 Some of the revenue is profit for
drug dealers, some the extra
cost of selling an illegal good.
Supply and Demand for Cocaine
Prohibition
Legal supply
Introduction to Economics (Combined Version) 5th Edition