Explore BrainMass

Elasticity and linear demand

Please re-word the following into your own words and include some examples. Its a respond to the question, Explain why the price elasticity of demand varies along a demand curve, even if the demand curve is linear.

As we move down a demand curve, the percentage change in price (quantity) varies. When price is relatively high, a one unit change in price is small in percentage terms. When price is relative low, a one unit change is much higher as a percent of the price. The same is true for quantity demanded. Given the inverse relationship between price and quantity along a demand curve and the formula for calculating elasticity, as we move down a demand curve, percentage change in price increases and the corresponding percentage change in quantity demanded increases, causing the ratio of the two to get smaller in absolute terms.

Solution Preview

Elasticity of demand = % change in quantity / % change in price

A linear demand curve starts at a point of high price, low quantity demanded, as we move down the curve, the prices and the quantity demanded increases. When the price high, a decrease in one unit is small as percentage of the mid point between original price and new price (for the arc elasticity of ...

Solution Summary

The inverse relationship between price and quantity in a linear demand curve are explained in the solution.