Why does the price elasticity of demand decrease along a straight line demand curve?

Skills You'll Learn

Economics, Microeconomics, Economic Analysis, Market (Economics)

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From the lesson

Understanding Markets: Elasticities, Market Surplus, Efficiency, and Equity

Taught By

• 

  Rebecca Stein

  Senior Lecturer

Price elasticity of demand (PED)

A measure of the resposniveness of the demand for a product to changes in its own price.

PED - formula

Price elasticity of demand is calculated and defined as:

Price elasticity of demand = % change in Qd / % change in P

Where Qd = Quantity demanded
and P = Price

Some students find it difficult to remember which way up this equation is. The following 'aide memoire' may be of use. You usually put your dinner (demand) on your plate (price). Demand is over price, D over P!

Price elasticity is negative because price and quantity demanded usually vary inversely with each other. This is so common that the sign is ignored. Do not forget, when price increases, demand falls and vice versa.

Elasticity values

Elasticity ranges from zero to infinity and the value is given different names over different numerical ranges as summarised in the table below.

Elasticity along a straight line demand curve

Because of the way that it is calculated, price elasticity will vary along a straight - line demand curve. Examine Figure 1 carefully.

Figure 1 Elasticity along a straight-line demand curve

It is usual to represent the degree of elasticity graphically. The common shapes for demand curves and their elasticity values are given in the diagrams below.

Figure 2 Perfectly inelastic demand curve

Figure 3 Inelastic demand curve

Figure 4 Elastic demand curve

Figure 5 Perfectly elastic demand curve

The special shape that represents a price elasticity of 1 is known as a rectangular hyperbola! This is shown below.

Figure 6 Unit elastic demand curve

Determinants of price elasticity

Price elasticity of a good or service depends on a range of factors:

• The availability of close substitutes in the market. The more substitutes available the greater the elasticity.
• Is the good a luxury or necessity? Luxuries are more elastic in demand than necessities.
• Proportion of income spent on them. Cheap items tend to have an inelastic demand.
• Are they addictive? These obviously become price inelastic.
• The time period. Elasticity tends to increase with time.
• Number of uses

For more detail on any of these factors, follow the links above.

You will be expected to calculate and use elasticity, and to interpret given data. This may happen in any of the papers that are taken. Some examples follow (click on the example links) and there are a series of practice questions which are accessible from the questions section (click on questions - module 2 in the left-hand menu bar).

Example 1 - price elasticity of demand

Example 2 - price elasticity of demand

Elasticity and revenue

Remember that if demand for a good or service is price inelastic then an increase in price will decrease sales but increase sales revenue. However, a price cut will increase both sales but decrease sales revenue.

Firms like the demand for their product if possible to be inelastic. This means that any increase in price that they put in place will have proportionately less of an effect on demand and their total revenue will rise.

If price elasticity is 1, then revenue is the same all the time, even if prices are increased or decreased.

The changes in revenue for different elasticity values are summarised in the table below.

Why does elasticity decrease along the demand curve?

What happens to the price elasticity of a straight line demand curve slopes down?

Is the price elasticity of demand constant along a straight line demand curve?

What is the elasticity of a straight line demand curve?