Finance and the Economy · Seminar 3 · Elasticity

Two drivers, two demand curves

Jan asks for 30 litres, Lou asks for €30-worth, and neither looks at the price. Slide the pump price and compare how much each takes and spends. Question 3, from Business Economics (Mankiw, Taylor & Ashwin, ch. 5).

Choose a driver, then move the price. The reference point is €1.50 a litre, where both take 20 litres.
cheapdear

Jan takes

Jan spends

Lou takes

Lou spends

Check it with the midpoint formula. Between €1.50 and any other price, Lou’s proportionate change in litres is exactly the negative of his proportionate change in price, so the arc elasticity is −1 at every point on his curve. Jan’s change in litres is always zero, so hers is 0.

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