PRICE ELASTICTY AND SLOPE OF DEMAND CURVE

 

Learning Contents:                                                            

·         Slope of the Demand curve and  Price Elasticity of Demand

·         The demand curve may have the same slope but different elasticity.

·         Relationship between Price Elasticity and Slope of the Demand curve

 

The slope of the demand curve and the price elasticity of demand are different concepts but related to each other. As the price elasticity of demand is equal to the inverse of the slope of the demand curve times the ratio of price to quantity demanded. Also, the price elasticity of demand can be known by looking at the slope of the demand curve. A demand curve with a flatter slope signifies the high price elasticity. On the other hand, a demand curve with a steeper slope signifies low price elasticity. Let’s have a look at the concepts of slope and price elasticity of demand before going into the details of this topic.

The slope of Demand Curve

The slope is defined as the change in the variable on the Y-axis divided by the change in the variable on X-axis. Usually, price is shown on Y-axis, and quantity demand is shown on X-axis that forms a straight line downward sloping demand curve. It is calculated by dividing the change in price with the change in quantity demand.

Here,

 Î”P = change in price i.e. P2-P1

 Î”Q= change in quantity demand i.e. Q2-Q1

 

The slope of the Demand curve measures the absolute change in quantity demand in relation to the absolute change in price. For e.g. The demand for a commodity increases by 1000 units (absolute quantity change) when its price is reduced by ₹ 2 per unit (absolute price change).

Price Elasticity of Demand

Price elasticity of demand measures the percentage change in quantity demand as a result of percentage change in the own price of the commodity. In simple words, it states how much quantity demand for a commodity change as a result of a change in its own price. 


The concept of slope is not unit-free and therefore, not useful when goods with different prices and different units are to be compared together. It is often best to use a percentage change measure i.e. Price elasticity of demand, which is unit-free.

The demand curve may have the same slope but the different elasticity.

It is quite possible that a straight-line demand curve may have the same slope on all its points but with different degrees of elasticity. We know that, as we move down the same demand curve, the elasticity declines. On the upper part of the demand curve, the value of elasticity is more. While, on the Lower part of the demand curve, the value of elasticity is less. A straight line demand curve has the same slope but the different elasticity is explained with the help of the following example:

Example: 1









































Relationship between Different Degrees of Price Elasticity and their slopes.

Price Elasticity of demand and slope of demand are related to each other. Their relationship between different degrees of price elasticity and their slope is explained with the help of four following categories 1. The extreme case of Elasticity 2. Unitary Elastic demand 3. More than Unitary Elastic demand 4.Less than Unitary Elastic demand

 

1. Extreme Case of Elasticity of Demand

1.1. Perfect Elastic Demand

1.2.Perfect Inelastic Demand

2. Unitary Elastic Demand

3. More than Unitary Elastic Demand

4. Less than Unitary Elastic Demand

 

1. Extreme Case of elasticity of demand includes two cases of elasticity when elasticity is equal to zero and when it is infinite. The explanation is mentioned below:

Case 1.1: Perfect or Infinite Elastic Demand – (Slope is 0, Elasticity is ∞)

Perfect elastic or infinite elastic demand curve is usually shown as a straight line parallel to X-axis indicating any price if set above the prevailing price would drop the demand to zero. Figure 1.1 A horizontal straight-line demand curve shows that consumers can demand an infinite number of commodities at a specified price. The slope of a horizontal line is always zero because the price remains unchanged with only change in the quantity demanded the commodity.


Perfect Elastic Demand Example

Understanding how slope is zero and elasticity is infinite when demand curve is horizontal or parallel to X-axis.

Assuming the price is constant, with only change in quantity demand.

P= 5

Q= 2

P1 = 5

Q1 = 4

 














Figure 1.1















Case 1.2: Perfect Inelastic Demand – (Slope is ∞, Elasticity is 0)

Perfect inelastic demand curve is usually shown as a straight vertical line parallel to Y-axis indicating quantity demand would remain same irrespective of change in price. Usually, Perfect inelastic demand is applicable in goods with necessities. Figure 1.2 shows the slope of a vertical line is always infinite because the quantity demand remains unchanged with only a change in the price of the commodity.

Perfect Inelastic Demand Example

Understanding how slope is infinite and elasticity is zero when the demand curve is vertical or parallel to Y-axis.

Assuming the quantity demand is constant with only change in price

P=3

Q=5

P1 = 6

Q1 = 5















Figure 1.2

















2. Unitary Elastic Demand (Rectangular hyperbola demand curve, Elasticity is 1)

Unitary elastic demand refers to a situation when a percentage change in price is equal to a percentage change in the quantity demand. Simply, it is when the change in demand is equal to the change in price.  This type of demand is rarely found in real-life situations. In Figure 2, DD is the rectangular hyperbola demand curve showing elasticity of demand is equal to 1 at all points on it.

Unitary Elastic Demand Example

Understanding how elasticity is 1 when the demand curve is a rectangular hyperbola.

Assuming that % change in Q.D = % change in price.

P=5

Q=20

P1 =7

Q1 = 12

 


 

































3.More than Unitary Elastic Demand (Flatter Slope, Elasticity is >1)

More than unitary elastic demand refers to a situation when a percentage change in quantity demand is greater than the percentage change in the price of the commodity. Simply, it is when the change in demand is greater than the change in price. Therefore, its elasticity is greater than 1 (or Ed>1). In Figure 3, the demand curve (DD) is flatter showing high elasticity as quantity demand changes at a rate higher than the price.

More than unitary elastic Demand Example

Understanding how slope is flatter as elasticity is more than 1

Assuming that % change in Q.D >% change in price

P=8

Q=5

P1 =6

Q1 =15














Figure 3





















4. Less than Unitary Elastic Demand (Steeper Slope, Elasticity is <1)

Less than unitary elastic demand refers to a situation when a percentage change in quantity demand is less than the percentage change in price. Simply, when a big change in price produces a very little change in demand. The Elasticity of demand is less than 1 (or Ed < 1). In Figure 4, the demand curve (DD) is sloping downward from left to right showing the change in quantity is less than the change in the price of the commodity. The demand curve is steeper showing less elasticity as quantity demand changes at a rate lower than the price.

Less than Unitary Elastic Demand Example

Understanding how slope is steeper as elasticity is less than 1

Assuming that % change in Q.D < % change in price

P=4

Q=15

P1 =8

Q1 =10













Figure 4

D



















Let’s try some questions

Choose the Correct Answer

1.  The slope of a demand curve depends on

a. the units used to measure quantity but not the units used to measure price  

b. the units used to measure price and the units used to measure quantity

c. the units used to measure price but not the units used to measure quantity.

d. neither the units used to measure price nor the units used to measure quantity

2.  The price elasticity of  demand depends on

a. the units used to measure quantity but not the units used to measure price  

b. the units used to measure price and the units used to measure quantity

c. the units used to measure price but not the units used to measure quantity.

d. neither the units used to measure price nor the units used to measure quantity(units-free)

3. When the slope of demand curve=∞, the elasticity of demand is?

a. 0

b. 1

c. ∞

d. none of these

4. When the slope of demand curve =0, the elasticity of demand is:

a. 0

b. 1

c. ∞

d. none of these

5. As the flatness of demand curve increases, the elasticity of demand becomes?

a. higher

b. lower

c. equal to infinity

d. equal to zero

6. When the price elasticity of demand for a good equal?

a. 0, the demand curve is horizontal

b. 1, the demand curve is vertical

c. 1, the demand curve is horizontal

d. 0, the demand curve is vertical

Answer Key

 

1.b

2.d

3.a

4.c

5.a

6. d

 

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