What this lesson teaches
I can use price, income and cross elasticities to judge how large those changes will be.
Syllabus 9570, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply, income and cross elasticities of demand
Make a guess
A demand curve is a straight line. Is PED the same at every point along it?
- No. It is inelastic near the top and elastic near the bottom.
- Yes, because the slope is the same everywhere.
- No. It is elastic near the top and inelastic near the bottom.
Show the answer
No. It is elastic near the top and inelastic near the bottom.
The slope is constant, but PED uses percentage changes. At high prices and low quantities, a small price change is a small percentage while the quantity change is a big one.
Along a straight demand curve, the slope is constant but PED changes: elastic at the top, inelastic at the bottom.
It is tempting to say a steep curve is inelastic and a flat one is elastic. That works when comparing two curves through the same point, but not along one curve.
On a straight downward-sloping demand curve, the slope is the same everywhere, but PED is not. Near the top, the price is high and the quantity low, so a small change in price is a small percentage, while a change in quantity is a big percentage. Demand is elastic there.
Near the bottom, the opposite is true, so demand is inelastic. Exactly halfway along, PED is 1.
So always state which part of the curve you mean, or compare curves through the same point.
- Straight demand
- Elastic at the top, unit elastic at the midpoint, inelastic at the bottom.
- Comparing curves
- Steeper through the same point means more inelastic.
Worked example: Two price rises on the same straight demand curve
Suppose demand is a straight line. At $2, 160 units are sold; at $3, 140. At $15, 40 units are sold; at $16, 20.
- Low price: price +50%, quantity -12.5%, so PED = -0.25 (inelastic).
- High price: price +6.7%, quantity -50%, so PED = about -7.5 (elastic).
- Both are $1 rises that cut sales by 20 units, yet the elasticities are very different.
Watch out for this
A straight-line demand curve has the same PED everywhere because its slope is constant.
PED uses percentage changes, and these depend on the starting price and quantity. PED falls as you move down the line.
Check your understanding
A firm is operating on the upper part of a straight demand curve. What should it do to raise revenue?
- Nothing; revenue is the same at every point on a straight line.
- Raise its price.
- Cut its price.
Show the answer
Cut its price.
Right. Demand is elastic on the upper part, so a price cut raises quantity by a bigger percentage.