Economics, 3rd Edition

FIGURE 4.11

Quantity

 

1

2

 

3

4

5

6

5  

10  

25  

30  

20  

15  

D

2

 

D

1

Price (

€)

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CHAPTER 4  ELASTICITY AND ITS APPLICATIONS  91

The slope of the line as drawn is:

ΔP

ΔQ

=

−5

1

= −5

The slope is the same at all 

points along a linear demand 

curve. The price which we start 

with prior to a change will give 

different ratios at different points 

on the demand curve. Again, using 

demand curve D

2

, the ratio of P/Q at 

the initial price of 10 is 10/2

= 5. At 

a price of 5, the ratio of P/Q given 

by the demand curve D

2

 would be 

5/3

= 1.67.

Going back to our formula:

Price elasticity of demand

=

ΔQ

ΔP

·

P

Q

The first part of the equation 

(

ΔQ/ΔP

  

) is the reciprocal of the 

slope of the demand curve and the 

second part of the equation P/Q 

gives us a specific point on the 

demand curve relating to a particu-

lar price and quantity combination. 

Multiplying these two terms gives 

us the price elasticity of demand at a 

particular point and so is referred to 

as point elasticity of demand.

The price elasticity of demand 

when price changes from 10 to 5 in 

demand curve D

2

 above, would be:

Price elasticity of demand

=

1

5

·

10

2

Price elasticity of demand

= 1

If we were looking at a fall in 

price from 15 to 10 we would get:

Price elasticity of demand

=

1

5

·

15

1

Price elasticity of demand

= 3

And if looking at a price fall from 5 

to 2.5 then we would get:

Price elasticity of demand

=

0.5

5

·

10

3

Price elasticity of demand

= 0.33