Price Elasticity of Demand: Variation Along a Straight-Line Demand Curve

This section explores how the price elasticity of demand changes as we move along a straight-line demand curve. Understanding this variation is crucial for analyzing consumer responsiveness to price changes.

Understanding Price Elasticity of Demand

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. It is calculated as:

$$PED = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$$

The value of PED provides insights into how sensitive consumers are to price fluctuations:

• Elastic Demand ($|PED| > 1$): Quantity demanded is highly responsive to price changes. A small price change leads to a relatively large change in quantity demanded.
• Inelastic Demand ($|PED| < 1$): Quantity demanded is relatively unresponsive to price changes. A price change has a smaller impact on quantity demanded.
• Unit Elastic Demand ($|PED| = 1$): Percentage change in quantity demanded is equal to the percentage change in price.

Demand Curves and Elasticity Variation

For a straight-line demand curve, the price elasticity of demand is not constant along its length. The elasticity changes depending on the point on the curve.

At the top of the demand curve (where quantity demanded is low): The demand curve is relatively steep. A small price change will result in a proportionally larger change in quantity demanded. Therefore, the demand is relatively elastic.

At the bottom of the demand curve (where quantity demanded is high): The demand curve is relatively flat. A price change will result in a proportionally smaller change in quantity demanded. Therefore, the demand is relatively inelastic.

Illustrative Example

Consider a straight-line demand curve for a product. Let's analyze the elasticity at two different points:

As shown in the table, the price elasticity of demand changes from elastic at a low price to inelastic at a higher price along the same demand curve.

Factors Influencing Elasticity Variation

The variation in price elasticity of demand along a straight-line demand curve is primarily due to the availability of substitutes and the necessity of the good.

When the quantity demanded is low (top of the curve), consumers have fewer substitutes available. Therefore, they are more sensitive to price changes, making the demand elastic.

When the quantity demanded is high (bottom of the curve), consumers have more substitutes available. They are less sensitive to price changes, making the demand inelastic.

Conclusion

The price elasticity of demand is not constant along a straight-line demand curve. It varies depending on the quantity demanded and is influenced by the availability of substitutes and the necessity of the good. Understanding this variation is essential for businesses when making pricing decisions.