Question

As we move down a linear demand curve, the price elasticity goes on decreasing'. Comment.

Short answer

In conclusion, the statement "As we move down a linear demand curve, the price elasticity goes on decreasing" is true. This is because, on a linear demand curve, as the price decreases, the demand increases, making consumers less sensitive to changes in price. Thus, the price elasticity of demand (PED) decreases as we move down the curve, showing that the demand for the product becomes less elastic as the price decreases.

Step-by-step solution

Define a linear demand curve and price elasticity of demand

A linear demand curve is a straight line that represents the relationship between price (P) and quantity demanded (Q). It has the general equation of Q = a - bP, where 'a' and 'b' are constants. Price elasticity of demand (PED) is a measure of how much the quantity demanded of a product changes when there is a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, or: PED = $\frac{\mathrm{\%}\mathrm{\Delta }Q}{\mathrm{\%}\mathrm{\Delta }P}$

Derive the formula for price elasticity on a linear demand curve

We can find the PED on a linear demand curve using calculus. Now let's differentiate the linear demand function Q = a - bP with respect to price P: $\frac{dQ}{dP}=-b$ Now we substitute this value into the PED formula: PED = $\frac{\mathrm{\%}\mathrm{\Delta }Q}{\mathrm{\%}\mathrm{\Delta }P}=\frac{dQ}{dP}\times \frac{P}{Q}$ Substitute the value of $\frac{dQ}{dP}$ from above and plug in Q = a - bP: PED = $-b\times \frac{P}{a-bP}$

Show how moving down the linear demand curve affects price elasticity

As we move down the linear demand curve (i.e., as the price decreases), the value of P in the PED formula on a linear demand curve also decreases. Since the denominator of the fraction (a - bP) will increase, the absolute value of PED will decrease. To put it more clearly, as we move down the demand curve (from left to right), quantity demanded increases and price decreases: 1. If the price is very high, the PED will be high (elastic) because consumers can significantly reduce their consumption due to the high price. 2. As the price decreases, the PED will decrease (become less elastic) because consumers will be less sensitive to small price changes. So, as we move down a linear demand curve, the price elasticity does indeed go on decreasing.

Key concepts

Linear Demand Curve

In economics, the linear demand curve is a fundamental concept that helps us understand the relation between price and quantity demanded. Picture a demand curve as a straight diagonal line on a graph where price (P) is on the vertical axis and quantity (Q) is on the horizontal axis. The linear demand curve is represented by the equation: $$Q=a-bP$$ Here, 'a' is the quantity demanded if the price were zero, a hypothetical scenario, and 'b' is the rate at which demand changes in response to changes in price.

• When P is at its maximum, Q becomes minimal, indicating that fewer people are willing to buy.
• Vice versa, when P is lowered to zero, Q reaches its peak, implying maximum demand.

Understanding this equation allows us to predict the quantity demanded when the price changes, a valuable tool for decision-making in business.

Calculus in Economics

Calculus plays an important role in economics, especially when analyzing how different factors interact with one another. One classical application is in determining price elasticity of demand (PED). Using calculus, economists can assess how sensitive the quantity demanded is to changes in price.Differentiating the linear demand equation $Q=a-bP$ with respect to P gives us the marginal change in quantity with a change in price, which is represented as $\frac{dQ}{dP}=-b$.

• This represents a consistent rate of change along a linear demand curve.
• The negative sign suggests that, typically, as price increases, demand decreases.

The formula for PED becomes:$$PED=\frac{dQ}{dP}\times \frac{P}{Q}=-b\times \frac{P}{a-bP}$$This formula shows how elastic demand is at any given point on the curve. Calculus bridges the relationship between the price and demand, offering analytical insight into market behavior.

Economic Sensitivity Analysis

Economic sensitivity analysis involves evaluating how responsive demand is to changes in economic factors like price, using tools like price elasticity of demand (PED). Understanding this sensitivity helps businesses and policymakers make informed decisions. As one moves down a linear demand curve:

• The price decreases, which means consumers are less sensitive to changes.
• The PED becomes less elastic or decreases from a higher value indicating greater consumer responsiveness, to a lower value showing less responsiveness.

This is because, at higher prices, any additional cost weighs significantly on purchasing decisions. Conversely, at lower prices, minor changes in price become less impactful to demand. This economic sensitivity analysis guides pricing strategies, helping determine the best price points for maximizing revenue and consumer satisfaction.