ELASTICITY ON THE LINEAR DEMAND CURVE

Prepared by Kanit Kuevibulvanich

P
I Consider a linear demand function denoted by
a Qd = a − bP
b
II We find the endpoint co-ordinates on each axis:
at P = 0 ⇒ Qd = a … horizontal intercept
€ a
III at Qd = 0 ⇒ P = … vertical intercept
€ b
a
2b € Also, find the midpoint co-ordinate of P and Qd:
IV a a
€ at P = ⇒ Qd = … midpoint
2b 2
€ V
Recall the own-price elasticity of demand:
a Q %ΔQd dQd P
a € ηQ d ,P = =
2 %ΔP dP Qd

dQd d
€ the demand function: dQ = −b . Hence, we can simply find the own-
We need to find from
€ dP €dP
P
price elasticity of demand by substituting P and Qd into: ηQ d ,P = −b d .
Q
€ €
Observation I – At the vertical-intercept endpoint: ηQ d ,P = −∞ (perfectly elastic)

Proof Substitute Qd = 0 and P =

a € a ( ) a
; therefore, ηQ d ,P = −b b = − = −∞ .
b 0 0
€
Observation II – At the quantity demanded lower than midpoint: ηQ d ,P < −1 (elastic)
€
a €1 2 €a " 1 % 2" a % "P% "1%
Proof If Qd < ⇒ d > and P > ; hence, P$ d ' > $ ' ∴ ηQ d ,P = −b$ d ' < −b$ ' < −1.
2 Q a 2b # Q & a # 2b & #Q & #b&
€
Observation III – At the midpoint: ηQ d ,P = −1 (unitary elastic)
€ € €
a a
a a ( )
Proof Substitute Q = and P = ; therefore, ηQ d ,P = −b 2b = − 2 = −1.
d

2 2b a a
2 2
€

Observation IV – At the quantity demanded higher than midpoint: −1 < ηQ d ,P < 0 (inelastic)
€ €
a 1 2 a€ " 1 % 2" a % "P% "1%
Proof If Q > ⇒ d < and P < ; hence, P$ d ' < $ ' ∴ ηQ d ,P = −b$ d ' > −b$ ' > −1.
d

2 Q a 2b # Q & a # 2b & #Q & #b&

€
Observation V – At the horizontal-intercept endpoint: ηQ d ,P = 0 (perfectly inelastic)
€ € € 0
Proof Substitute Q = a and P = 0; therefore, ηQ d ,P = −b = 0 .
d

a
€
€ €
€