Linear Demand Curve Elasticity Explained
For a linear demand curve, the price elasticity of demand is not constant. It changes as we move along the curve from one point to another.
Movement Along the Demand Curve
- As price falls and quantity demanded rises (moving down the curve), the ratio of price to quantity ($P/Q$) decreases.
- The slope of a linear demand curve ($\frac{dQ}{dP}$) is constant but negative.
Elasticity Calculation
The point elasticity formula is $E_d = \frac{dQ}{dP} \times \frac{P}{Q}$.
Because the slope ($\frac{dQ}{dP}$) is constant and negative, and the ratio $\frac{P}{Q}$ decreases as we move down the curve, the absolute value of the elasticity ($|E_d|$) also decreases.
Conclusion
This means that elasticity declines as one slides down the demand curve. At the top (high price), demand is elastic; at the bottom (low price), demand is inelastic; and at the midpoint, it is unit elastic.
Important Questions from Demand analysis
The supply curve of cars is expected to shift rightwards with:
i. An increase in the price of cars
ii. A decrease in fuel prices
The supply curve of a normal good is ____________ sloping. It depicts ___________ on the x-axis and ___________ on the y-axis.
The demand curve gives the quantity demanded by the consumer at each ____________.
Which of the following statements is INCORRECT in the context of demand function?
Marginal Product is defined as:
