Price Elasticity of Demand & Supply

How strongly quantity responds to price, and why it decides who bears taxes and how revenue moves.

Equilibrium: Q* = 50.0, P* = 40.0

Current equations

D: P = 80 − 0.8·QS: P = 10 + 0.6·Q

Elasticity is the slope question: when price moves, how hard does quantity respond? Flatten the demand curve and buyers become deal-hunters; steepen it and they pay whatever it takes. Watch the shaded surpluses change as you rotate the curves.

Shift the curves

Demand elasticity (right = flatter = more elastic)0

Flat demand: buyers flee small price rises. Steep demand: they pay almost anything (necessities, addictions).

Supply elasticity (right = steeper = less elastic)0

Steep supply: producers can't easily expand output (housing, concerts). Flat: easy to scale.

The Price Elasticity of Demand & Supply model, in writing

Definition

The responsiveness of quantity demanded to price, measured in percentages so it is unit-free: elastic demand stretches a lot for a small price change, inelastic demand barely moves.

PED = %ΔQd / %ΔP ; |PED| > 1 elastic, < 1 inelastic

The intuition

Elasticity decides who can raise prices and what happens to revenue: cutting price raises revenue only when demand is elastic. Necessities with no substitutes (petrol, insulin) are inelastic; luxuries with many substitutes are elastic. On a straight-line demand curve elasticity is not constant, it falls as you slide down.

Exam tip

Revenue test: price and revenue move in OPPOSITE directions when demand is elastic, the SAME direction when inelastic. Quote elasticity as a percentage ratio, not a slope.

Related models in Micro Foundations

Production Possibility Frontier →Absolute vs. Comparative Advantage →Supply & Demand →Consumer & Producer Surplus →