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
Sweezy's kinked demand curve model to explain the price and output determination relates to which type of market structure?
Match List I with List II
List I
List II
A.
Snob effect
I.
If firms are disproportionately powerful, the market leader makes the first move and captures two-thirds of the market.
B.
Small-world model
II.
When some people demand a smaller quantity of a commodity as more people consume it, in order to be different and exclusive
C.
Stackelberg model
III.
Oligopolistic firms seek to maximise sales after an adequate rate of profit has been earned to satisfy stockholders.
D.
Sales maximisation model
IV.
Theory that a corporate giant can be made to operate as a small firm by linking well connected individuals from each level of the organisation to one another.
Choose the correct answer from the options given below:
Arrange the following economic identities in a sequential evolution to understand consumer demand.
A. Law of Demand
B. Utility analyses
C. Demand Elasticity analysis
D. Indifference curve analysis
E. Demand Forecasting
Choose the correct answer from the options given below
Which one of the following relationships regarding price elasticity coefficient with changes in price and change in total revenue is incorrect?
From the following determinants of the price elasticity of demand, indicate the correct code for the determinants having a positive relationship with the degree of the price elasticity of demand:
(a) Range of substitutes of the commodity
(b) Extent of the different uses of the commodity
(c) Portion of the income of the buyer spent on the commodity
(d) Income group of buyers purchasing the commodity
