Question

3. What is the difference between a "constant slope" demand curve and a "constant elasticity" demand curve? Give examples for each one of them.

Answer 1

A demand curve shows an inverse relation between the price that is charged on a commodity and its quantity demanded. Generally it is expressed as D(P) = a - bP. In this part, the variable 'a' is a constant reflecting the quantity demanded when price is 0. And 'b' is the slope of the demand curve, the derivative of the demand function with respect to price.

A demand function that is a straight line will always have a constant slope and is called a constant slope demand curve. This implies that the slope along the demand curve is not changing. An example of such demand function is Q = a - bP. Here 'b' is fixed.

While the constant elasticity demand curve is a demand function that has a constant elasticity throughout the curve. The slope, price and quantity combinations may change, but elasticity will remain constant. There are two specific cases for constant elasticity, horizontal line implying perfectly elastic demand curve and vertical line implying perfectly inelastic demand curves where elasticity is fixed at ∞ in case of perfectly elastic demand and 0 in case of a perfectlly inelastic demand. There is a third case where slope is decreasing continuosly but the elasticity is constant and the demand function is convex to the origin.