Why is demand elastic in the northwest segment of a graph?

Question

Teacher explained it, still don't get it... if u could an example would be helpful too... Thank you.

Answer 1

U need a graph to check it out. Remember that elasticity deals with the % change in quantity when there is a % change in price. In the "nortwestern" part of the demand, the absolute values for prices are regularly much bigger than the absolute value of quantity.

For now, lets assume that the demand is Q=100-P, whic means that the absolute change in quantity is -1 when the price goes up by 1. Now, let's pick 2 points. In one point, at a price of $99, 1 unit is sold. In the other, when the price is $10, 90 units are sold. All is easy, right?

Now look at what happens to the RELATIVE change in quantities by just moving one dollar in the price. If the price goes from 99 to 98, the PERCENTAGE change is just 1/98, which is slightly more than 1%.... and the quantity increases from 1 to 2, but the PERCENTAGE change is 1/2, which is 50%... notice how the little change in percentage of the price brought this huge percentage change in quantity. This is what economists call elastic demand, because the huge relative impact .

What happens at the other point... if we move the price from 11 to 10, we get a PERCENTAGE change of 1/10 or 10%, while increasing the PERCENTAGE of quantity from 89 to 90, which is something in the neighborhood of the 1.5%.... Now look how this big % change in price brought us a little % change in quantity. This is what economists call inelastic.

With a demand, the absolute change of -1 remains constant (it's a straight line), but when you tie it to the relative changes in terms of quantity, you get the effect.

Answer 2

The only time there is zero elasticity is when life itself is at stake. Then you buy the medicine even though you're in the donut hole of Medicare D.

Demand is price-elastic because -- as you well know -- when prices go up you buy less, or not at all.

I don't know what the teacher is talking about, northwest segment. Northwest quadrant to me, assuming price on the X axis and quantity on the Y axis, negative pricing. So you get paid for accepting more. More what?

Answer 3

For an elastic demand, if price goes up, total revenue (price multiplied by quantity) goes down. For a linear demand curve, in the NW part of the graph (at high prices and low quantities), if price goes up, total revenue goes down.

You can see this diagrammatically by looking at the sizes of the rectangles traced out by lines showing prices and quantities. The areas of these rectangles represent total revenue.