Chapter 3Supply,

Demand,and

ElasticityIntroduction to Economics (Combined Version) 5th Edition

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 DDTSuppose 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

Legal supply

Prohibition