Demand Curves According to Their Elasticity
The shape of the demand curve affects its elasticity. When the demand curve is vertical, the demand is perfectly inelastic. When the curve is horizontal, it is perfectly elastic. An elastic demand curve tends to have a smaller slope or be flatter, while an inelastic demand curve tends to have a steeper slope. Let's examine each of these cases in detail.
Perfectly Inelastic Demand Curve
A perfectly inelastic demand curve is vertical, meaning that the quantity demanded does not respond to price changes. In the graph, if the price increases from 30 to 60, the quantity demanded remains at 400, showing no change.
Inelastic Demand Curve
For an inelastic demand curve, the elasticity is less than one, meaning that the percentage change in quantity demanded is smaller than the percentage change in price. In the graph, a price increase from 30 to 60 results in a relatively smaller decrease in quantity demanded.
Unit Elasticity Demand Curve
When demand elasticity is unitary, a percentage change in price leads to an equal percentage change in quantity demanded. For example, if the price increases by 50% (from 40 to 60), the quantity demanded increases from 400 to 600, maintaining proportionality.
Note that elasticity is not unitary throughout the entire demand curve, only at these two points, because the percentage changes in both price and quantity are equal. If we move to two different points on this demand curve, this no longer holds true.
Elastic Demand Curve
In an elastic demand curve, the elasticity is greater than one, meaning that the percentage change in quantity demanded is larger than the percentage change in price. For instance, an increase in price from 30 to 60 causes a significantly larger decrease in the quantity demanded.
Perfectly Elastic Demand Curve
A perfectly elastic demand curve is horizontal, indicating that any small price increase leads to a dramatic drop in the quantity demanded. In this case, consumers will purchase any quantity at a price of 40 or lower, but if the price rises even slightly above 40, demand falls to zero.
Price Elasticity of Demand and Slope
Since price elasticity of demand measures the responsiveness of quantity demanded to price changes, it is closely tied to the slope of the demand curve. Empirically, flatter demand curves have higher price elasticity, while steeper curves have lower price elasticity.