Figure 4-1 The Effects of a Supply Shift with Two Different Demand
Curves

4.1 Price Elasticity of Demand

Suppose there is a decrease in the supply of some farm crop—that is, a
leftward shift in the supply curve. We saw in Chapter 3 that such a
decrease in supply will cause the equilibrium price to rise and the
equilibrium quantity to fall. But by how much will each change? The
answer depends on what is called the price elasticity of demand.

Loosely speaking, demand is said to be elastic when quantity demanded is
quite responsive to changes in price. When quantity demanded is
relatively unresponsive to changes in price, demand is said to be inelastic

The importance of elasticity is illustrated in Figure 4-1. The two parts of
the figure have the same initial equilibrium, which is then disturbed by
the same leftward shift in the supply curve. But the demand curves are
different in the two parts of the figure, and so the sizes of the changes in
equilibrium price and quantity are also different.

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