Question

Demand in the market for some good is given by the following equation:

P=4

Suppose Q=5

Price elasticity of demand in this market is:

A) relatively inelastic

B) perfectly inelastic

C) relatively elastic

D) perfectly elastic

Answer 1

When the demand function is given by P = 4, it can be observed that the demand function is horizontal. The price of the good is independent of the quantity consumed.

So, we can say that change in price due to change in quantity is zero or

dP / dQ = 0

The inverse of this would be

dQ / dP = infinity = ∞

The price elasticity of demand is given by:

eP = (P/Q) * (dQ/dP)

At Q= 5 and P = 4, the price elasticity would be

eP = (4/5) * (∞) = ∞

Thus, the demand of the good has infinite elasticity or we can say that the demand is perfectly elastic. When the demand is perfectly elastic, an increase in the price above equilibrium level leads to fall in quantity demanded to zero. In other words, the consumers will consume at the given price only and will not buy the good at any other price.

So, the correct option is (D) perfectly elastic.