Elasticity Lab

Slide a price along a straight demand curve and watch elasticity and total revenue change as you go: elastic above the midpoint, unit elastic at it, inelastic below, with the revenue rectangle and the total revenue curve drawn beside it. Switch to income or cross-price elasticity and change income or the price of a related good: the demand curve shifts, and the sign tells you what kind of good it is.

What the model is

A teaching model: a straight-line demand curve, as the exam draws it.

• Price elasticity of demand is the percent change in quantity demanded divided by the percent change in price, reported as an absolute value |Ed|. Above 1 demand is elastic, below 1 inelastic, at 1 unit elastic.
• Along a straight demand curve the slope never changes but elasticity does: it is elastic above the midpoint, unit elastic at the midpoint and inelastic below it.
• The total revenue test. When price and total revenue (P × Q) move in opposite directions, demand is elastic; in the same direction, inelastic. Revenue is largest at the unit-elastic midpoint.
• Income elasticity keeps its sign: positive for a normal good (above 1 a luxury, between 0 and 1 a necessity), negative for an inferior good.
• Cross-price elasticity keeps its sign: positive for substitutes, negative for complements, zero for unrelated goods.
• Percent changes are measured from the starting values here; the midpoint method (divide by the average of the two values) is offered as an option and labeled wherever it is used.

Test yourself gives elasticity from two points, the total revenue test, the elastic and inelastic ranges, and income and cross-price elasticity, each step checked on its own.

Notes for this topic: Price Elasticity of Demand