Part (ii) of Figure 4-1 shows a case in which quantity demanded is quite
unresponsive to price changes—that is, demand is relatively inelastic. As
in part (i), the decrease in supply at the original price causes a shortage
that increases the price. However, in this case quantity demanded does
not fall much in response to the rise in price (demand is inelastic). The
result is that equilibrium price rises more, and equilibrium quantity falls
less, than in the first case.
In both cases shown in Figure 4-1 , the supply curves and their shifts are
identical. The sizes of the effects on the equilibrium price and quantity
are different only because of the different elasticities of demand.
The Measurement of Price Elasticity
In Figure 4-1 , we were able to say that the demand curve in part (i)
showed more responsiveness to price changes than the demand curve in
part (ii) because two conditions were fulfilled. First, both curves were
drawn on the same scale. Second, the initial equilibrium prices and
quantities were the same in both parts of the figure. Let’s see why these
conditions matter.
First, by drawing both figures on the same scale, we saw that the demand
curve that looked steeper actually did have the larger absolute slope. (The
slope of a demand curve tells us the amount by which price must change
to cause a unit change in quantity demanded.) If we had drawn the two