2.15:
Elasticity and Slope
The slope and elasticity of a demand curve might appear similar, but they differ significantly.
The slope of a demand curve measures the rate at which the quantity demanded changes as the price changes.
It is influenced by the units used for price and quantity, which makes comparing different products and markets challenging.
For example, a good priced in dollars has a different slope than one priced in cents.
Also, the slope doesn't fully capture price responsiveness.
For instance, a linear demand curve may maintain a constant slope but display varying price elasticity at different points.
Elasticity, in contrast, measures the percentage change in quantity demanded due to a one percent change in price.
It is not affected by the units of measurement, making elasticity a more standardized measure. This allows for comparisons across different products and markets.
Interestingly, in a linear demand curve, a relationship exists between slope and elasticity.
Rearranging the elasticity equation shows that the elasticity is the inverse of the slope multiplied by the ratio of price and quantity demanded.
2.15 Elasticity and Slope
The slope and elasticity of a demand curve, while related, serve different purposes in economic analysis.
Slope of Demand Curve:
- • The slope represents the rate at which the quantity demanded changes in response to a change in price.
- • It depends on the units used for measuring price and quantity, complicating comparisons across diverse products and markets. For instance, the slope for a product priced in euros per unit will differ from that of a product priced in yen per unit, even if their price responsiveness is similar.
- • A key limitation of slope is its inability to measure price responsiveness consistently across the curve. A product may have a constant slope but exhibit varying degrees of responsiveness to price changes at different price levels.
The Price Elasticity of Demand:
- • Price elasticity of demand measures the percentage change in quantity demanded resulting from a one percent change in price, providing a unit-free measure of price responsiveness.
- • This characteristic allows for direct comparisons of price sensitivity across different products and markets without the complications introduced by differing units of measurement.
- • On a linear demand curve, there is a mathematical relationship between slope and elasticity, indicating that elasticity varies along the curve despite a constant slope.