Page 81 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Figure 5.6

Elasticity of demand, e , is defined as the numerical measure of the degree to which quantity
p
demanded responds to a change in price, ceteris paribus. From the definition,
dQ P
e = . .
p
dP Q
Since the slope of a demand curve is dP/dQ, the term dQ/dP in the expression for e is the
p
reciprocal of the slope of a demand curve. Also, as the two demand curves are parallel, it follows
that their slopes and hence the reciprocals of their slopes are the same.
Thus at any given price level the elasticities of the straight line demand curves can be compared
by comparing their corresponding quantities.
At point A (demand curve D ) the quantity demanded is OR and at point B (demand curve D , but
1 2
at the same price as A) the quantity demanded is OS. Since OS > OR the P/Q ratio is greater in the
case of D . Hence point A has a higher elasticity than point B or the demand curve further away
1
from the origin is less elastic at each price than the one closer to the origin.
The elasticities of two intersecting straight line demand curves can be compared at the point of
intersection merely by comparing slopes, the steeper curve being less elastic.

Let two straight line demand curves, D and D , having different slopes, intersect each other at A,
1 2
as in Figure 5.7.
At the point of intersection, price (P) and quantity (Q) are the same for both demand curves.
Hence the P/Q ratio is the same for both demand curves at the point of intersection (point).

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