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CA Foundation · Business Economics · Theory of Demand and Supply

A linear downward-sloping straight-line demand curve is drawn on a price–quantity diagram. Moving from the midpoint of the curve towards the point where it meets the quantity axis, how does the price elasticity of demand (in absolute value) behave?

Elasticity falls below 1 and keeps decreasing towards zero. On a straight-line demand curve, elasticity is 1 at the midpoint, greater than 1 on the upper half and less than 1 on the lower half, reaching zero where the curve meets the quantity axis.

  1. AIt rises above 1 and keeps increasing
  2. BIt stays equal to 1 throughout
  3. CIt falls below 1 and keeps decreasing towards zeroCorrect
  4. DIt first falls and then rises

Explanation

On a linear demand curve, elasticity equals (lower segment)/(upper segment). At the midpoint it is 1. Moving towards the quantity axis, price falls and quantity rises, so elasticity falls below 1 and reaches zero at the quantity-axis intercept. Elasticity rising above 1 occurs on the upper half, towards the price axis.

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