Understanding Price Elasticity on a Straight-Line Demand Curve

The question asks about the order of price elasticity of demand as we move upward along a straight-line negatively sloped demand curve. Price elasticity of demand measures how much the quantity demanded of a good changes in response to a change in its price.

For a straight-line demand curve, the price elasticity of demand is not constant; it varies along the curve. The formula for price elasticity of demand (\(e_p\)) is:

\[e_p = \left| \frac{\text{% change in quantity demanded}}{\text{% change in price}} \right|\]

On a straight-line demand curve, while the slope (\(\frac{\Delta Q}{\Delta P}\)) is constant, the ratio of price to quantity (\(\frac{P}{Q}\)) changes. This means elasticity changes along the curve.

Variation of Price Elasticity Along a Linear Demand Curve

Let's analyze the elasticity at different points on a typical straight-line demand curve, which slopes downward from left to right:

• At the Y-intercept (where the demand curve hits the price axis): At this point, the price is maximum, and the quantity demanded is zero. The demand is perfectly elastic, meaning \(e_p = \infty\). This corresponds to option (E).
• In the upper half of the demand curve: Moving down from the Y-intercept towards the midpoint, the price is relatively high, and the quantity is relatively low. In this region, the demand is elastic, meaning \(e_p > 1\). This corresponds to option (B).
• At the Midpoint of the demand curve: Exactly in the middle of the straight-line curve, the price and quantity values result in unit elasticity, meaning \(e_p = 1\). This corresponds to option (D).
• In the lower half of the demand curve: Moving down from the midpoint towards the X-intercept, the price is relatively low, and the quantity is relatively high. In this region, the demand is inelastic, meaning \(e_p < 1\). This corresponds to option (C).
• At the X-intercept (where the demand curve hits the quantity axis): At this point, the price is zero, and the quantity demanded is maximum. The demand is perfectly inelastic, meaning \(e_p = 0\). This corresponds to option (A).

Ordering Price Elasticity Moving Upward

The question asks for the order of elasticity moving upward on the curve. Moving upward means starting from the point where the price is lowest (the X-intercept) and moving towards the point where the price is highest (the Y-intercept).

Let's list the elasticity values encountered as we move upward:

1. Starting at the X-intercept (Price = 0): Price elasticity is 0. (Option A)
2. Moving upward into the lower half: Price elasticity is less than 1. (Option C)
3. Reaching the midpoint: Price elasticity is equal to 1. (Option D)
4. Moving further upward into the upper half: Price elasticity is greater than 1. (Option B)
5. Reaching the Y-intercept (Quantity = 0): Price elasticity is infinity. (Option E)

Therefore, the correct order of price elasticity values moving upward on a straight-line negatively sloped demand curve is:

\((A), (C), (D), (B), (E)\)

Analyzing the Given Options

Let's compare our derived order with the provided options:

• (A) ep = 0 when price is 0
• (B) ep > 1
• (C) ep < 1
• (D) ep = 1
• (E) ep = ∞

The order moving upward is \(e_p=0\), \(e_p < 1\), \(e_p = 1\), \(e_p > 1\), \(e_p = \infty\).

Matching this sequence to the options (A) through (E):

Sequence: \(e_p=0\) (\(A\)) \(\rightarrow\) \(e_p < 1\) (\(C\)) \(\rightarrow\) \(e_p = 1\) (\(D\)) \(\rightarrow\) \(e_p > 1\) (\(B\)) \(\rightarrow\) \(e_p = \infty\) (\(E\)).

The correct order is \((A), (C), (D), (B), (E)\).

Revision Table: Price Elasticity on Linear Demand Curve

Additional Information: Understanding Demand Elasticity

Price elasticity of demand is a crucial concept in economics for understanding consumer behavior and its impact on market outcomes. It helps predict how changes in price will affect total revenue.

Types of Price Elasticity of Demand:

• Perfectly Inelastic Demand (\(e_p = 0\)): Quantity demanded does not change at all when price changes.
• Inelastic Demand (\(0 < e_p < 1\)): Quantity demanded changes by a smaller percentage than the percentage change in price.
• Unit Elastic Demand (\(e_p = 1\)): Quantity demanded changes by the same percentage as the percentage change in price.
• Elastic Demand (\(e_p > 1\)): Quantity demanded changes by a larger percentage than the percentage change in price.
• Perfectly Elastic Demand (\(e_p = \infty\)): Quantity demanded changes infinitely for a tiny change in price.

Factors Affecting Price Elasticity of Demand:

• Availability of Substitutes: Goods with many close substitutes tend to have more elastic demand.
• Necessity vs. Luxury: Necessities tend to have more inelastic demand than luxuries.
• Proportion of Income Spent: Goods that represent a larger portion of a consumer's budget tend to have more elastic demand.
• Time Horizon: Demand tends to be more elastic over longer periods, as consumers have more time to adjust to price changes and find substitutes.
• Definition of the Market: The elasticity depends on how narrowly the market is defined (e.g., demand for "food" is less elastic than demand for "organic tomatoes").