Question

A downward-sloping straight-line demand curve will have a a. higher price elasticity of demand coefficient along the top of the demand curve. b. lower price elasticity coefficient along the top of the demand curve. c. constant price elasticity of demand coefficient throughout the length of the demand curve. d. positive slope.

Short answer

The correct answer is (a) - A downward-sloping straight-line demand curve will have a higher price elasticity of demand coefficient along the top of the demand curve. This is because consumers are more responsive to price changes when the price is high.

Step-by-step solution

Review of Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Understanding Downward-Sloping Straight-Line Demand Curve

A downward-sloping straight-line demand curve indicates a negative relationship between price and quantity demanded, meaning as the price of a good decreases, consumers demand more of it.

Price Elasticity Along the Demand Curve

Price elasticity of demand varies along this straight-line demand curve. It is more elastic (higher price elasticity) when the price is high (top of the demand curve), meaning consumers are more responsive to price changes. As we move down the demand curve and the price decreases, the price elasticity of demand becomes less elastic (lower price elasticity), meaning consumers are less responsive to price changes. Now, let's analyze the given options. a. higher price elasticity of demand coefficient along the top of the demand curve. As we discussed, the price elasticity of demand is higher (more elastic) at the top of the downward-sloping straight-line demand curve. So, this statement is true. b. lower price elasticity coefficient along the top of the demand curve. This statement is the opposite of the correct one, so it is false. c. constant price elasticity of demand coefficient throughout the length of the demand curve. The price elasticity of demand is not constant along the straight-line demand curve, as we discussed. So, this statement is false. d. positive slope. The downward-sloping straight-line demand curve indicates a negative relationship between price and quantity demanded, so it has a negative slope, not a positive one. This statement is false.

Conclusion

Among the given options, only option (a) is true. A downward-sloping straight-line demand curve will have a higher price elasticity of demand coefficient along the top of the demand curve.

Key concepts

Demand Curve

A demand curve is a graphical representation of how the quantity demanded of a good or service changes in response to changes in price. It typically slopes downwards from left to right, illustrating that as the price decreases, the quantity demanded increases. This downward slope reflects the fundamental economic principle of the law of demand.
When drawing a demand curve, the X-axis usually represents the quantity demanded, while the Y-axis shows the price of the good. As prices lower, consumers are more likely to purchase larger quantities since the product becomes more affordable.
The slope of the demand curve is significant because it helps us understand the degree of sensitivity or responsiveness of consumers to price changes. In a simple linear (straight-line) demand curve, this sensitivity varies along the curve:

• The top part of the curve (high price, lower quantity) is more elastic, indicating greater sensitivity.
• The bottom part of the curve (low price, higher quantity) is less elastic, reflecting reduced sensitivity.

Thus, understanding the specific characteristics of a demand curve is crucial for interpreting consumer behavior in economic terms.

Economic Theory

Economic theory is the study of how people and societies make decisions about resource allocation, considering scarcity and the incentives that influence choices.
Price elasticity of demand is a core concept within economic theory. It describes how quantity demanded reacts to price changes. A higher price elasticity means that consumers respond strongly to price alterations, which can influence business strategies and policy decisions.
For example, if a product has high elasticity, a small increase in price might lead to a significant drop in sales, prompting firms to consider lowering prices to boost demand. Conversely, inelastic products won't see much change in demand even if prices rise, allowing businesses the flexibility to adjust prices without drastically affecting sales.
By using economic theory, businesses can predict consumer reactions and optimize pricing strategies. Governments can also apply these theories to understand the impact of taxes and subsidies on goods and services. Therefore, grasping economic theory and its relationship with elasticity provides valuable insights into market dynamics and consumer behavior.

Consumer Responsiveness

Consumer responsiveness refers to how consumers adjust their buying habits when prices change. The degree of responsiveness is measured by the price elasticity of demand, which is a critical indicator for businesses and policymakers.
High consumer responsiveness, or high elasticity, signifies that consumers are very sensitive to price changes. For instance, in luxury goods or when many substitute products exist, price changes can lead to significant shifts in demand.

• If prices rise, consumers quickly reduce their purchases.
• If prices fall, purchases increase noticeably.

Conversely, low consumer responsiveness indicates inelastic demand, where price changes have a minimal effect on the quantity demanded. Essentials like utilities or basic food items often exhibit inelastic demand since these are perceived as necessities, and consumers can't easily change their consumption patterns.
Understanding consumer responsiveness helps businesses set pricing strategies that align with market demand. It allows them to predict the potential impact of price changes on sales volumes and revenues more accurately. Therefore, recognizing how consumers might respond to different price levels enables more strategic decision-making.