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CA Foundation · Business Economics · Theory of Demand and Supply

A linear demand curve slopes downward and touches both axes. Moving from the vertical-axis intercept down to the horizontal-axis intercept, how does price elasticity of demand (in absolute value) behave?

On a linear downward-sloping demand curve, elasticity falls steadily from infinity at the price-axis intercept to zero at the quantity-axis intercept, because the P/Q ratio keeps shrinking as one moves down the curve while the slope stays the same. Unit elasticity occurs at the midpoint.

  1. AIt rises steadily from zero to infinity
  2. BIt falls steadily from infinity to zeroCorrect
  3. CIt remains constant and equal to one throughout
  4. DIt is first zero, then one, then infinity

Explanation

On a straight-line demand curve, elasticity at a point equals (P/Q) times the reciprocal of the slope. Near the price axis P is high and Q is tiny, so elasticity is very large (infinite at the intercept). Near the quantity axis P tends to zero, so elasticity tends to zero. The option saying it rises reverses the direction of movement.

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