Elasticity: Elasticity

It is a little difficult to visualize why elasticity is not constant on a straight-line graph without looking at a diagram. In , the slope of this hypothetical straight-line supply curve is constant (slope = 2), but the elasticity changes as you move along the graph. Let's assume that the price of this good is initially $3, and then increases to $5. In this case, the elasticity for the good can be calculated as follows:

Elasticity = (% Change in Quantity) / (% Change in Price)
Elasticity = [(2 - 1)/1] / [(5 - 3)/3] = 3/2

If the price increases from $5 to $7 however, the elasticity is calculated as follows:

Elasticity = (% Change in Quantity) / (% Change in Price)
Elasticity = [(3 - 2)/2] / [(7 - 5)/5] = 5/4

Figure %: Changes in Elasticity Over a Straight Line Graph

The lesson? Be careful when dealing with elasticity. Don't assume that elasticity will be constant, just because you're dealing with a straight line.

The Effects of Elasticity on Equilibrium Price and Quantity

As we already know, equilibrium price and equilibrium quantity in a given market are determined by the intersection of the supply and demand curves. Depending on the elasticities of supply and demand, the equilibrium price and quantity can behave differently with shifts in supply and demand. We can see one example of how this works if we imagine a supply curve shifting in and out along a single demand curve. If demand is very elastic, then shifts in the supply curve will result in large changes in quantity demanded and small changes in price at the equilibrium point.

Figure %: Shifts in Supply with Elastic Demand

If demand is very inelastic, however, then shifts in the supply curve will result in large changes in price and small changes in quantity at the equilibrium point.