In general, the more elastic a demand curve is:
A. the flatter it will be.
B. the steeper it will be.
C. the more bowed-in it will be.
D. the faster it will shift when price changes.
The correct answer and explanation is :
The correct answer is A. the flatter it will be.
Explanation:
Elasticity of demand refers to how sensitive the quantity demanded of a good or service is to changes in its price. When we talk about an elastic demand curve, it means that the quantity demanded changes significantly in response to even small price changes. The elasticity of demand is calculated using the formula:
$$
\text{Elasticity of Demand (E)} = \frac{\%\ \text{Change in Quantity Demanded}}{\%\ \text{Change in Price}}
$$
- Elastic Demand (E > 1): This is when the percentage change in quantity demanded is greater than the percentage change in price. A small change in price leads to a relatively large change in quantity demanded. This results in a flatter demand curve.
- Inelastic Demand (E < 1): In this case, the percentage change in quantity demanded is smaller than the percentage change in price. A significant change in price results in a smaller change in quantity demanded. This leads to a steeper demand curve.
Why does a more elastic demand curve lead to a flatter curve?
When demand is elastic, consumers are highly responsive to price changes. For example, if the price of a product decreases by a small amount, the quantity demanded will increase by a large amount because consumers are more willing to purchase the product at the lower price. This responsiveness creates a flatter slope, as the curve becomes less steep.
Conversely, when demand is inelastic, a price change has little impact on the quantity demanded, which results in a steeper demand curve.
Additional Points:
- Unitary Elastic Demand (E = 1): This is a special case where the percentage change in quantity demanded is equal to the percentage change in price. The demand curve will have an intermediate slope, neither steep nor flat.
- Elasticity affects revenue. For elastic demand, lowering prices increases total revenue, while for inelastic demand, increasing prices can raise total revenue.
In summary, the more elastic a demand curve is, the flatter it will be because consumers’ sensitivity to price changes is greater.