Price Elasticity by Peter M. Kerr � 2007 [2001] This monograph borrows heavily from Chapters 4, 5, and 11 of the author�s A Backdoor to Economics (1999).Table of Contents Chapter 1. Demand Chapter 2. Supply Answers ________________________________________________________________________________________________ Chapter 1. Demand Elasticity refers to the responsiveness of one variable to changes in another variable. Consider the demand for Coke and changes in its price. If a small drop in the price of Coke provokes a huge increase in the quantity demanded, then the demand is said to be highly responsive to changes in its price, or the demand is highly price elastic. A highly inelastic demand for Coke would be one where a huge drop in price results in a small increase in the quantity demanded. While elasticity is in one sense a new word for responsiveness, it is also a measure of this responsiveness. A coefficient of own price elasticity (E) could be generally defined as the percentage change (%Δ) in the quantity demanded divided by the percentage change in price(1) E = %Δ Qdemanded � %Δ P While this general definition is excellent
for interpreting a coefficient, for calculation purposes we must use the following variant of this definition. (2) Earc = │Δ Q / Σ Q │──────────── │Δ P / Σ P │ This formula prescribes the following steps: (i) Subtract the original value of the quantity from its new value. (ii) Add the original value of the quantity to its new value. (iii) Divide (i) by (ii). (iv) Subtract the original value of the price from its new value. (v) Add the original value of the price to its new value. (vi) Divide (iv) by (v). (vii) Divide (iii) by (vi). (viii) Erase the minus (-) sign, i.e., use the absolute value.
(i) 8 - 4 = 4 (ΔQ) (ii) 8 + 4 = 12 (ΣQ) (iii) 4 � 12 = 1/3 (i � ii) (iv) .6 - .8 = -.2 (ΔP) (v) .6 + .8 = 1.4 (ΣP) (vi) -.2 � 1.4 = -1/7 (iv � v) (vii) (1/3) � (-1/7) = - 7/3 = -2.3 (iii � vi) (viii) │-2.3│ = 2.3 = EA As a ratio of percentages, EA is a pure number, i.e., it has no unit of measure like dollars or cans. The fact that EA equals 2.3 can be interpreted as a "one percent drop in price will result in a 2.3 percent increase in quantity demanded." [Note that a 25 percent drop in price was matched with a 100 percent increase in quantity demanded. Using the general definition of the coefficient, (1) above, would yield E = 4.] Figure 1.  Oftentimes, new students of economics make the mistake of assuming that slope (i.e., "rise over run") and elasticity are the same. Clearly they are not. The slope of the demand curve is -20 and it is the same for any segment or arc of the demand curve. If price goes down by a dime, the quantity demanded goes up by 2 cans. What is the coefficient of elasticity in a different region of the demand curve? In figure 2 suppose that price began at $.40 and dropped to $.20. The coefficient of elasticity would be .4. Whereas the slope of a straight line never varies, the elasticity of a straight-line demand curve depends upon the segment under consideration. Figure 2. In terms of magnitude only (aka, absolute value) EA is greater then EB. Consider segment A; when price drops from $.80 to $.60, this is a decrease of $.20 or 25 percent. In segment B, the same decrease of $.20 is a 50 percent decrease. While both segments have the same absolute drop in price, arc A has a smaller relative drop. At the same time, both segments have the same absolute increase in quantity demanded, i.e., 4. However, arc A has a larger relative increase, 100 percent compared to arc B's 33 2/3 percent. Comparing segment A to B, a relatively smaller drop in price nets a relatively larger increase in quantity demanded. Clearly, quantity demanded is more responsive to price changes in region A than B, i.e., demand is more elastic in region A than B. This, of course, is reflected in the measures of elasticity. The greater the coefficient's absolute value, the more elastic the demand. According to the coefficients, a one percent drop in price would result in a 2.3 percent increase in quantity demanded in arc A, but only a .4 percent increase in arc B. The absolute value or the magnitude of the coefficient of elasticity allows economists establish categories for different demands. If E > 1, then the demand is said to be elastic. If E < 1, then demand is said to be inelastic. If E = 1, then demand is said to be unit elastic. In the latter case, the percentage change in price is exactly matched by the percentage change in quantity demanded. Table 1 summarizes this classification.
Value of Relationship between Type of Applying these criteria to the demand curve in Figure 3, demand in arc A is elastic while demand in B is inelastic. The coefficient of elasticity for a price drop from $.80 to $.20 (section C in Figure 3) is 1 which means that demand over C is unit elastic. Elasticity's elusiveness stems from the fact that it is a relative concept.
1. Suppose that a 20 percent drop in the price of bicycles resulted in a 10 percent increase in sales. In this case, the elasticity of demand for bicycles would be A. elastic. 2. When the Lasky Shoe Store dropped the price of a canvas sneaker from $25 to $20, sales increased from 50 pairs to 70 pairs per week. The magnitude of the coefficient of elasticity is A. .66 2/3. Revenues and Elasticity If the cigarette tax is raised, what will that add to the public coffers? How about hiking the gasoline tax? To what extent will it encourage conservation and to what extent will it enrich public treasuries? The answer to these types of questions lies in the responsiveness of demand, or, more correctly, the elasticity of the demand. If the demand is very elastic, i.e., the buyers are very sensitive to price increases, then the growth in tax collections may be disappointing. A better source of tax revenue may be a good with inelastic demand, where an increase in price does not discourage purchases. To see why this is true, a new concept which is quite commonplace in business is introduced. If you ask a businessman how his company is doing, he might give you his "gross sales," simply the total amount of money that he has received from his customers. What he means by his gross sales is what economists call total revenue. The total revenue (TR) for a firm is merely the price (P) of the product times the number of units sold (Q). (3) TR = P x Q.A. Total Revenue and Elasticity Consider the demand curve in Figure 4. Assume that the seller charges every customer the same price, a common situation. In the table immediately below Figure 4, the total revenue and the coefficient of elasticity are calculated. Since the later requires numbers from two rows (i.e., two prices and two quantities), the coefficient is posted between rows. Figure 4 (1) (2) (3) (4)
P Qd TR E 3 7 3 21 16/7 (1.86) 6 4 24 12/9 (1.22) 5 5 25 9/11 (.82) 4 6 24 7/13 (.54) 3 7 21 1/3 (.33) 2 8 16 While a decrease in price will always increase quantity, the table shows that total revenue will not always increase. When price is cut from 8 to 7, revenue increases from 16 to 21. But, when price is cut from 5 to 4, total revenue decreases from 25 to 24. Note that where total revenue is increasing, the coefficient of elasticity is greater than one which means that demand is elastic. Where total revenue is decreasing, the coefficient is less than one which means that demand is inelastic. These observations may be summarized in the total revenue rule. When price and total revenue move in the same (opposite) direction, demand is inelastic (elastic). For example, when price falls from 8 to 7 and total revenue increases, the coefficient of elasticity is 3, which being greater than 1 indicates an elastic demand. The notion of elasticity explains why revenues may increase or decrease with a price cut. In an elastic region of a demand curve, a relatively small price cut is matched with a relatively large increase in quantity. Any revenues lost from the price cut are made up through an increase in unit sales. In the inelastic region of a demand curve, the increase in unit sales is not sufficient to cover the losses. Suppose the seller is currently charging $8 per unit. His unit sales would be 2 units with revenues of $16. In the next period, he reduces price to $7 per unit. His sales and revenues would be 3 units and $21 respectively. Compared to the previous period, the seller has sacrificed one dollar of revenue from the sale of each of the first two units in order to sell a third unit for $7. He experiences a net gain in revenue of $5. In this case, a relatively small drop in price (a 12.5 percent drop) is more than offset by an increase in quantity sold (a 50 percent increase). Consider a price cut from $3 per unit to $2 per unit. In this instance, a 331/3 percent cut in price is matched with only a 14.3 percent increase in quantity which is not enough to avoid a loss in revenue of $5. Only when the percentage change in price is the same as the percentage change in quantity will total revenue remain unaffected. And, of course, in this case, demand is unit elastic. B. Total Revenue, Area, and Elasticity Much of the material discussed in the previous section can be more easily seen in a graph without making a single calculation. Consider the two diagrams in Figure 5. The area of the box ABC0 in diagram A is 50 square inches. On the other hand, the area of the box DEF0 in diagram B is 50 dollars. Figure 5 Diagram B requires the reader to recognize entirely different scales. The vertical scale or ruler measures "dollars per unit;" the horizontal scale measures quantity or "units of product." The arithmetical product of the two yields "dollars." Compare the calculations. Area = height x width AABC0 = 5" x 10" = 50 sq. in. ADEF0 =
$5 x 10 units = $50. Figure 6 is a duplication of Figure 4. At a price of $8 per unit, price and quantity demarcate the box ABC0. The area of this box is 16 dollars. Being the product of price times quantity, this is total revenue. When price drops to $7 per unit, the area of box EFG0 represents total revenue of 21 dollars. That this second box is larger that the first box should be apparent without calculation. In this instance, a drop in price results in an increase in total revenue. Demand is elastic. Figure 6 Notice that each of the small squares has an area of $1. At a price of $8 per unit, 2 units are sold. There are 8 one-dollar boxes stacked on each of the two units. A total of 16 one-dollar boxes go to make up ABC0. At a price of $7 per unit, 3 units are sold. There are 7 one-dollar boxes stacked on each of the 3 units. Total revenue is 21 dollars. When the seller reduces price from 8 to 7, he sacrifices a one-dollar box on each of the first two units (a two-dollar box) in order to gain 7 one-dollar boxes from the sale of the third unit (a seven-dollar box). The net gain is 5 one-dollar boxes. Total revenue increases by $5. Figure 7 highlights this trade-off. Figure 7 We now have a method of determining elasticity that does not require a single calculation. In Figure 7, the gain box is greater than the loss box. So when price falls, total revenue increases and demand is elastic. This, of course, works in the other direction. If price were to increase, each box would be relabeled and total revenue declines. Since price and total revenue move in the opposite direction, demand is elastic. Determine the elasticity (i.e., elastic, unit elastic, or inelastic) of the following demand curves.
3. 4. 5. 6. 7. 8. There is a valuable application of the revenue approach to elasticity for politicos or anyone interested in raising funds via specific taxes on particular goods. Such taxes are called excise taxes, in part to distinguish them from general sales taxes. When a tax is imposed on a product, the producer will attempt to collect it from the eventual purchaser by increasing price. If the goal of the politician is to raise funds via an excise tax, then he would want to tax a good whose demand is relatively inelastic. Raising the price in this case has less of an impact on the quantity sold and consequently, less of an impact on the revenues collected. Consider the demands for products A and B diagrammed in Figure 8. Suppose that the sellers of A and B have each chosen a price of one dollar and each has total revenues of 100 dollars. Now suppose government wants to raise funds by taxing one of these two goods. More specifically, the would-be seller will have to buy a 20 cent stamp that must be affixed to each unit of the good (not unlike the little stamps on packages of cigarettes). That either seller would automatically raise his posted price by 20 cents to cover the additional cost is not a fait accompli. Nevertheless if this were so, the seller of A would have to purchase 80 stamps and the seller of B would have to purchase 50. Consequently, by taxing A, government would raise $16 of tax revenues. Taxing B would net only $10 in taxes. If revenues are the government�s primary goal, a tax on A is more lucrative. Figure 8 Which of the two goods has the more elastic demand in the relevant price range? Comparing the total revenue boxes quickly reveals the answer. In fact, boxes representing the tax revenues can be identified. The area of box ABCE represents the tax revenues raised by taxing good A. The area of box FGHJ represents the revenues raised by taxing good B. The larger tax box occurs with the less elastic demand. In antiquity, governments were clever to tax items of low elasticity such as salt. Today governments are more nefarious. They impose "sin" taxes on goods of relatively low elasticity such as cigarettes and alcohol (the kind you drink). The politicos justify such high taxes on the grounds that they are trying to help people reduce consumption of evil products. This is nonsense. These items are taxed because their elasticities of demand are quite low. C. Determinants of Elasticity Several methods of identifying the price elasticity of demand have been presented. But why is it that the demand for one good is more or less elastic than the demand for another good? What are the determinants of the elasticity of demand? Economists usually place the determinants into three categories. The more substitutes there are for a given good, the more elastic its demand is likely to be. How many substitutes are there for a can of Coke? How many substitutes are there for carbonated soft drinks? Suppose that you go to the vending machine area to purchase a Coke. You anticipate that all of the soft drinks will be priced at 55 cents. When you get there, you find that Coke is now 65 cents though the others remain at 55 cents. Suppose that you consider Pepsi and Dr. Pepper to be close substitutes for Coke and you purchase one of them instead. On the other hand, suppose all of the soft drink prices had gone to 65 cents, then you are likely to purchase Coke. In the first case, you were able to respond to the increase in the price of Coke (i.e., "show some elasticity") because there were several substitutes for Coke. In the second case, you showed no response to the increase in the prices of all soft drinks because there were no close substitutes for "all soft drinks."The higher the price of a given good relative to buyers� budgets, the more elastic demand is likely to be. The price of a cardboard can of salt is about 30 cents. Suppose the price were increased by a whopping 50 percent to 45 cents. What sort of response is this likely to elicit from buyers? If you were the manager of a grocery store would you dedicate less shelf space to salt because of this price increase? The price is so small relative to anyone's budget, that a relatively large increase in price is likely to have a very small impact on sales, if any at all. While many people may consider price in their purchases of meat, they are much less likely to consider price in their purchase of salt. Of course, if the price of salt increased 3,300 percent to $10 per can, everyone might become more conscious of the amount that they use and buy.On the other hand, a relatively expensive item is likely to have a more elastic demand. As their name implies, buyers are more likely to shop price on "big ticket" items. This fact is not lost to the successful retailers of appliances and furniture. Their primary job is to convince the buyer that the price of a clothes washer is as low as it is ever going to get. Does anyone ever pay "full price" for a refrigerator or a sofa (or, at least, admit it)? A third determinant of elasticity is time.* The more time that buyers have to purchase a good, the more elastic demand is likely to be. A complicating factor about big ticket items is that they tend to be durable or provide service for a long time. For instance, consider a mattress and box springs. The need to replace a mattress and box springs is not likely to occur overnight. Buyers have plenty of time to shop price. Refrigerators tend to have a long service life as well. More often than not, refrigerators are purchased to match a remodeled kitchen rather than to replace a broken one. However, suppose your refrigerator went kaput, or worse, suppose your air conditioner burned out in the middle of a July heat wave. Would you be willing to wait for a sale on air conditioners in the fall? Or are you going to replace it right away and get "gouged" by the retailer. By purchasing at "any" price, you would exhibit little responsiveness to price or a low elasticity of demand. The previous example shows why each of the previous enunciations on determinants uses the words "likely to be." If a product has a lot of substitutes, this does not mean that the demand for it will definitely be elastic. The other two determinants must also be considered. For many, Coca Cola has a number of close substitutes but because the price of a can constitutes such a small part of many buyers� budgets, the demand may yet be inelastic. In attempting to explain the elasticity of demand for a particular product, each determinant must be considered and the relative strength of each surmised. Consider one more example of the importance of time. In the early 1970s the OPEC oil cartel flexed its muscles for the first time. The price of oil and, consequently, the price of gasoline skyrocketed. In the short term there was little that the American consumer could do. All three determinants explained why the demand was highly inelastic. First, there were no close substitutes. Second, despite the increase in price, expenditures on gasoline were still small relative to household budgets (i.e., households, not teenagers). Third, consumers needed gasoline to get to work tomorrow, they could not wait for a better price. As a result consumers bought about as much gasoline as they did before the price increases. However, as time passed, consumers were able to respond to the higher prices of gasoline. For the first time Americans began to buy the type of cars that the rest of the world was driving - smaller, more fuel efficient autos. Like their big American counterparts, the smaller cars were complements to gasoline, but substitutes for the gas-guzzling American cars of that time. A second development was that many Americans moved closer to their work places (which in subsequent decades has been reversed), reducing the amount of gasoline needed for the daily commute. Over time, American consumers exhibited a much more elastic demand for gasoline. D. Extremes To this point every example has assumed that the law of demand has been in effect. What types of demand curves are possible when the law of demand does not apply? What are the implications for elasticity? Consider the imaginary demand for salt in Figure 9. In the price range below one dollar, buyers are totally unresponsive to any changes in price. At the current price of 30 cents, buyers want 100 cans. If price were increased to 50 cents, the demand would remain at 100 cans. In this region demand is said to be totally or perfectly inelastic. Between 50 cents and 30 cents, the coefficient of elasticity is zero and so it would be for any price range below one dollar. Figure 9. Prior to 1971 the United States' monetary system was nominally based on the gold in Fort Knox; the U.S. was on a gold standard. One of the rules of the gold standard was that the U.S. Treasury had to be ready and willing to buy any and all amounts of gold proffered at the then official price of $35 per ounce. The Treasury's demand at this time is diagrammed in Figure 10. The arrow at the right end of the demand curve serves to indicate that the extent of the Treasury�s purchases at a price of 35 dollars per ounce is unlimited. Under this type of demand, the buyer(s) is totally responsive to any change in price. If you offered to sell gold to the Treasury at $35 per ounce, the Treasury would buy any amount that you wanted to sell, say 100 ounces. But, if you were to insist on receiving $35.01 per ounce, the Treasury would say no deal. With a 1 penny increase in price, the Treasury's quantity demanded zips from 100 to zero. Consider the Treasury's responsiveness in the other direction. Suppose instead of wanting to sell the Treasury 100 ounces, you decide to dump 200 ounces. Does the Treasury need a lower price to encourage an increase in its purchases? No. A zero decrease in price and quantity demanded would zip from 100 to 200 ounces. Can a demand be anymore responsive than this? In this situation, demand is totally or perfectly elastic. The coefficient of elasticity is difficult to calculate in this case. Depending upon the reader's level of mathematical sophistication, the coefficient is either undefined or approaches infinity. Figure 10
E. Review Exercise Figure 11 diagrams two different demands faced by a local pizzeria. Demand on the weekend is much greater due to an increased preference for pizza. Figure 11
When price is cut from 10 to 8 dollars during the week the coefficient of elasticity is (9) ___ (fill-in), but on the weekend it is (10)___. Notice that the relative change in price is the same. The difference in the coefficients stems solely from the relative change in quantity demanded. For instance, a 20 percent price cut on a weekday from 10 to 8 results in a 50 percent increase in pizzas sold. The same price cut on a weekend day yields only a 12� percent increase in sales. Consider the effect of this same price cut on revenues. Whether a weekday or weekend day, the area of the gain box is the same. The amount is (11)_______. The difference shows up in the loss boxes. Revenue lost from a price cut on a weekday is (12)______, while the loss on the weekend is (13)______. Consequently, two bucks off on a pizza during the week will (14) (increase/decrease) revenues by (15)______, but during the weekend it will (16) (increase/decrease) revenues by (17)______. Does this analysis provide any explanation for those pizza coupons that give a price break during certain hours or specific days of the week? Consider a local movie theater that provides a price break on shows before 6 pm. It may be experiencing the same types of shift in demand. The lower Rush Hour Price may be based on a demand similar to the weekday demand in Figure 11. Where would demand have to be in order for the price range between 8 and 10 dollars to be unit elastic? To draw a unit elastic demand, one must have a loss box equal in size to the gain box. Such a box would result if the quantity demanded were (18)______ pizzas at a price of $10 per pizza and (19)______ at a price of 8. Before continuing, respond to the following questions. 20. Considering that the number of substitutes is likely to affect the elasticity of demand, which of the following products is likely to have the most elastic demand? A. Chevrolet automobiles 21. Each year a youngster saves up $40 to go on rides at the county fair. This year he discovers that the prices of the rides are up from last year. He spends all of his money anyway. His demand for amusement rides at the fair is A. perfectly elastic. 22. Along a straight-line demand curve, A. the higher price ranges are characterized by elastic demand. 23. If demand is perfectly inelastic, an increase in price will A. decrease the quantity demanded and
total revenue. ________________________________________________________________________________________________ Chapter 2. Supply The concept of elasticity is equally applicable to supply. The categories for elasticity introduced in Table 1 for demand work just as well for supply. The table is duplicated here.
Value of Relationship between Type of Consider the supply curve in Figure 12. Using the formula for Earc [equation (2) above], the elasticity of supply for the segment bordered by W and X is 2⅓, while the elasticity over Y and Z is 1.6. Once again it is seen that elasticity is not the slope (�). Figure 12 The previously introduced total revenue rule does not apply to supply because price and total revenue always move in the same direction. Yet there is an easy way to determine the elasticity of supply through visual inspection. Figure 13 provides a guide for straight-line, or linear, supply curves. Figure 13
If the supply curve intersects the vertical or price axis, supply is elastic (E > 1) in any price range. If the supply curve cuts the horizontal or quantity axis, supply is inelastic (E < 1). If the supply curve runs through the origin, supply is unit elastic (E = 1). Before continuing, respond to the following questions. 24. Given Selastic in Figure 13, the coefficient of elasticity when price increases from 5 to 6 is A. .27. 25. Given Sinelastic in Figure 13, the coefficient of elasticity when price increases from 2 to 4 is
A. ⅓. 26. Regardless of the supply curve in Figure 13, as one considers subsections or arcs further along the curve A. the smaller the coefficient becomes. The previous question (#26) exposes some interesting results. For an elastic supply curve, the higher the price range considered, the less elastic the supply. For an inelastic supply curve, the higher price range considered, the more elastic the supply. Indeed, there is convergence. Figure 13 is useful in estimating the elasticity of supply curves that are not straight lines (nonlinear). Consider figure 14. Approximating arc ab with a straight line suggests that supply is elastic. Similarly, arc cdis unit elastic and arc ef is inelastic. Figure 14 A. Extremes To this point, every supply curve has conformed with the law of supply, i.e., an increase in price results in an increase quantity supplied. Time is an important determinant of the elasticity of supply for produced goods. In a very short period of time, a manufacturer may be unable to produce more of his product. How quickly can a farmer grow additional bushels of wheat? How rapidly can a utility plant already running 24/7 generate additional kilowatts? Given time, these manufacturers will respond to higher prices by producing more. But in the immediate future, there may be little that can be down to increase output. Hence, market price rises but current output remains unchanged. In other words, there is an increase in price but not increase in the quantity supplied. Supply is totally unresponsive to changes in price. Figure 15 diagrams the perfectly inelastic supply in such cases. Figure 15 When price increases from 3 to 5, the quantity supplied does not change. It remains at 4. Supply cannot be any less responsive; it is totally inelastic. The coefficient of elasticity will be zero for any price range because the numerator will be zero. At the other extreme is perfectly elastic supply. Earlier it was seen that under a gold standard the U.S. Treasury had to be ready and willing to buy any and all amounts of gold proffered at the official price. This was easy enough for the Treasury to do, i.e., trade paper money for gold. However, the Treasury must also be ready and willing to sell any and all amounts of gold at the official price. Figure 16
The supply curve in figure 16 indicates that the Treasury will/must sell gold to anyone offering to pay the then official price of 35 dollars per ounce. A higher price is not required to encourage the Treasury to sell more gold. Supply cannot be any more responsive than this, i.e., an increase in quantity supplied with no increase in price. As earlier with the perfectly elastic demand, the calculation of the coefficient of elasticity is difficult. It is either undefined or approaches infinity. It was the Treasury�s inability to maintain a perfectly elastic supply that prompted the United States� abandonment of the gold standard in 1971. At the time, the price of gold soared to $90 per ounce. Maintenance of the official price would have quickly drained Fort Knox. Today, of course, the price of gold is much higher. To conclude this monograph, use the information in Figure 13 to answer the following questions. 27. Which of the supply curves in the figure above is more elastic? Figure 18
28. Which of the supply curves in Figure 18 is less elastic? ________________________________________________________________________________________________ Answers 1. C 2. B 3. inelastic 4. unit elastic 5. unit elastic 6. inelastic 7. elastic 8. elastic 9. 1.8 10. .53 11. $400 12. $200 13. $800 14. increase 15. $200 16. decrease 17. $400 18. 200 19. 250 20. D 21. E 22. E 23. C 24. B 25. C
Percentage Change (% Δ) in a variable is commonly calculated as follows:(1) Subtract (-) the original value from the new value. (2) Divide (�) the value found in (1) by the original value. (3) Multiply (x) the value found in (2) by 100 percent. Is a straight line demand curve elastic?No, a straight-line demand curve does not constant elasticity. In a straight-line demand curve, the price elasticity is unitary at a single point. Above this point, the demand is price elastic while it is price inelastic below the point.
What section of a straight line demand curve is elastic the elasticity of demand is elastic?In general, demand is elastic in the upper half of any linear demand curve, so total revenue moves in the direction of the quantity change. Moving from point A to point B implies a reduction in price and an increase in the quantity demanded. Demand is elastic between these two points.
What is price elasticity of demand if the demand curve is a straight line?Price elasticity of demand is equal to infinity (Ed=∞) when demand curve is a horizontal straight line.
Is a flat demand curve elastic or inelastic?Demand Curves and Elasticity
The flatter demand curve, D2, shows a change in quantity demanded of 40 products (from 60 to 100) when the price changes by $1 (from $9 to $8). Clearly, the flatter demand curve shows a much greater quantity demanded response to a price change. Therefore, it is more elastic.
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A single, straight-line demand curve can be elastic in one region and inelastic in another.
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