In a perfectly inelastic demand curve, a vertical line illustrates that consumers are unwilling or unable to change quantity
demanded regardless of the price. Prescription medication is a good example of this. Quantity demanded, over a certain
price range, will not fluctuate because of a change in price. People on prescription medication are going to continue to
purchase the amount needed because it is a necessity. Figure 7-2 shows that a perfectly inelastic demand curve is com-
pletely vertical, with one quantity at every price level.
Figure 7-2In between these two extremes of elasticity we have the demand curves for most products. As you know, the demand curve
for most products is a downward sloping line that illustrates the relationship between prices and quantity demanded.
The price elasticity of demand varies along the demand curve, declining as we move downward. The reason for this is
that elasticity is calculated using percentages. Along a straight-line demand curve, equal changes in price mean equal
changes in quantity. However, these same changes in quantity and price do not translate into the same changes in per-
centages. A $1.00 change at the top of the demand curve is a significantly different percentage change from a $1.00
change at the bottom of the demand curve. Therefore, as we move down the demand curve from higher prices to lower
prices, from lower quantities to higher quantities, a given price change becomes a larger percentage change in price.
The opposite is true of quantity changes. As we move downward along the demand curve, the same change in quantity
becomes a smaller percentage change.
The demand curve is divided into three regions of elasticities. The top portion is the elastic part of the good. All price
changes will have a significant impact on quantity demanded. The middle portion of the demand curve is the unitary
elastic point. This is where price and quantity rival each other. From the unitary point to the base of the demand curve,
we have the inelastic region. Here, any price changes will have little or no impact on the quantity demanded.
Applying Price Elasticity of Demand
Price elasticity of demand is an extremely useful tool. It informs firms just how much they can increase their prices with-
out affecting their total revenue or quantity demanded. Questions like what price to charge, whether to advertise, whether
to charge different prices at different times of the day, all can be answered by looking at the price elasticity of demand.
Any firm concerned with increasing revenue must know what the current price elasticity of demand is for its product. A
close relationship exists between total revenue and elasticity. Total revenue is the price of the product times the number of
times it is sold. This is not to be confused with profit because profit is revenue minus costs. If the price rises by 10 percent
and quantity falls by more than 10 percent, then total revenue declines as a result of a price increase. If price rises by
10 percent and quantity falls by less than 10 percent, then total revenue increases as a result of a price increase. Total
revenue increases as a result of a price increase if the product is inelastic. Total revenue decreases as prices increase when
the product is elastic in demand.
Whenever the price elasticity of demand for a product is in the elastic region, the firm must lower the price to increase
total revenue. Think about it: if people are sensitive to your prices changing, are you going to raise your prices to gain
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