The demand for bus riders is a linear downward-sloping line. How does the price elasticity of demand change as the price of a bus ride falls? The price elasticity of demand for bus rides __ as the price of a bus ride falls. A. is constant B. increases C. decreases
The correct answer and explanation is:
The price elasticity of demand for bus rides C. decreases as the price of a bus ride falls.
Explanation:
When demand is represented by a linear downward-sloping demand curve, it means the quantity demanded decreases at a constant rate as price increases, and increases at a constant rate as price decreases. However, the price elasticity of demand (PED) does not remain constant along this line.
Price elasticity of demand measures how responsive the quantity demanded is to a change in price, calculated as: PED=% change in quantity demanded% change in price\text{PED} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}
On a linear demand curve:
- At high prices and low quantities, a small percentage decrease in quantity demanded corresponds to a large percentage change in price, making demand more elastic (PED > 1).
- At low prices and high quantities, the same change in quantity demanded corresponds to a smaller percentage change in price, making demand less elastic (PED < 1).
Thus, as the price of a bus ride falls, the price elasticity of demand decreases — the demand becomes less elastic or more inelastic.
Why?
- At higher prices, consumers are more sensitive to price changes because the bus ride is relatively expensive compared to other transport options or their budget. A small drop in price encourages a relatively larger increase in quantity demanded.
- At lower prices, the bus ride is cheaper and may already be affordable for most people willing to ride the bus. Further price decreases lead to smaller percentage increases in quantity demanded because many potential riders are already using the service. So, demand becomes less sensitive to price changes.
Summary:
- The price elasticity of demand varies along a linear demand curve.
- It is elastic (high PED) at high prices and inelastic (low PED) at low prices.
- Therefore, as the price of a bus ride falls, the price elasticity of demand decreases.