Now, the elasticities also vary along the demand curve, with the portion above midpoint of the demand curve being elastic and the other portion of the demand curve being inelastic. {Elasticity at the mid point of the demand curve is -1.}
Now, my question is what does this elasticity of -0.4 mean to us? Does it mean that the equilibrium point lies below the mid point of the demand curve, i.e. in the inelastic region? I was curious to know. Is it possible that for some price p, the elasticity of the cigarette will be in the elastic region? I am curious.
A price elasticity of demand of -0.4 means that if they raise prices 1%, demand will drop 0.4%: demand is price inelastic. It means that cigarette companies aren’t earning as much revenue as they could be: they should raise the price of cigarettes until the price elasticity of demand is -1.0.
Thank you S2000magician, as always, for your help. However, does -0.4 have anything to do with the location of the intersection of the equilibrium point along a demand curve? I have drawn a picture for this:
Do you think the intersection would lie on the inelastic region? If not, why? If yes, why? Can you please explain this to me? It will be great if you could clarify this for me. I would really appreciate your help.
I don’t know if the market for cigarettes is in equilibrium or not, but, assuming that it is, the intersection is in the inelastic portion of the demand curve; in that region, the (absolute value of the) price elasticity of demand is less than one.
Downward sloping curve, right? See it in your mind? The point from price to mid-price is an elastic range. Below that, price in inelastic. Rather, a change in the price of ciggs (inelastic) hardly effects smokers Qd or consumption of ciggs. On a curve, it would look as though the intersecting points from Qd to D curve to P to a new set of all that Qd ->D -> P yield a small change in Qd relative to price. I mean, there aren’t too many other substitutes to self-harming that’s so socially acceptable as smoking so the Qd changes slighly relative to price.
Draw out the lines, see the rectangles - The verticle rectangle box that is Qd for a good with 1>E will be slighlty larger always then the change in Price.
On the other hand, something like vapor ciggarettes - an alternative to ciggs would cause the Elasticity of ciggs to approach E=0 or perfect elasticity, where you’ll find that the Qd indeed is in sync with the change in price BUT beyond that point the Qd begins to EXCEED the change in price.
Yes, the interaction lies in the inelastic region =), you’re right.