You are here

Constant Price Elasticity of Demand Curves

25 April, 2016 - 09:12

Figure 5.5 shows four demand curves over which price elasticity of demand is the same at all points. The demand curve in Panel (a) is vertical. This means that price changes have no effect on quantity demanded. The numerator of the formula given in Equation 5.2 for the price elasticity of demand (percentage change in quantity demanded) is zero. The price elasticity of demand in this case is therefore zero, and the demand curve is said to be perfectly inelastic. This is a theoretically extreme case, and no good that has been studied empirically exactly fits it. A good that comes close, at least over a specific price range, is insulin. A diabetic will not consume more insulin as its price falls but, over some price range, will consume the amount needed to control the disease.

media/image68.png
Figure 5.5 Demand Curves with Constant Price Elasticities
 

The demand curve in Panel (a) is perfectly inelastic. The demand curve in Panel (b) is perfectly elastic. Price elasticity of demand is −1.00 all along the demand curve in Panel (c), whereas it is −0.50 all along the demand curve in Panel (d).

As illustrated in Figure 5.5, several other types of demand curves have the same elasticity at every pointon them. The demand curve in Panel (b) is horizontal. This means that even the smallest price changes have enormous effects on quantity demanded. The denominator of the formula given in Equation 5.2 for the price elasticity of demand (percentage change in price) approaches zero. The price elasticity ofdemand in this case is therefore infinite, and the demand curve is said to be perfectly elastic. This isthe type of demand curve faced by producers of standardized products such as wheat. If the wheat ofother farms is selling at $4 per bushel, a typical farm can sell as much wheat as it wants to at $4 but nothing at a higher price and would have no reason to offer its wheat at a lower price.

The nonlinear demand curves in Panels (c) and (d) have price elasticities of demand that are negative;but, unlike the linear demand curve discussed above, the value of the price elasticity is constantall along each demand curve. The demand curve in Panel (c) has price elasticity of demand equal to−1.00 throughout its range; in Panel (d) the price elasticity of demand is equal to −0.50 throughout itsrange. Empirical estimates of demand often show curves like those in Panels (c) and (d) that have thesame elasticity at every point on the curve.

Heads Up!

Do not confuse price inelastic demand and perfectly inelastic demand. Perfectly inelastic demand means thatthe change in quantity is zero for any percentage change in price; the demand curve in this case is vertical.Price inelastic demand means only that the percentage change in quantity is less than the percentage changein price, not that the change in quantity is zero. With price inelastic (as opposed to perfectly inelastic) demand,the demand curve itself is still downward sloping.