Understanding Demand and Price Elasticity: Analyzing Statements A, B, C, and D

QUESTION

Which of the following statements is correct?

A. The own price elasticity of demand is constant at all points along a linear demand curve.

B. If a firm decreases the price of its product, its total revenue must decrease.

C. As we move down a demand curve, the price elasticity becomes relatively inelastic.

D. As the price of X falls and we move down an individual’s demand curve for X, the money income of the individual also changes.

ANSWER

Understanding Demand and Price Elasticity: Analyzing Statements A, B, C, and D

Introduction

Understanding demand and price elasticity is crucial for businesses and economists alike. This essay aims to analyze and determine the accuracy of the following statements: A) The own price elasticity of demand is constant at all points along a linear demand curve. B) If a firm decreases the price of its product, its total revenue must decrease. C) As we move down a demand curve, the price elasticity becomes relatively inelastic. D) As the price of X falls and we move down an individual’s demand curve for X, the money income of the individual also changes.

A) The own price elasticity of demand is constant at all points along a linear demand curve.
Statement A suggests that the own price elasticity of demand remains constant along a linear demand curve. However, this statement is not entirely accurate. The own price elasticity of demand varies along a linear demand curve. Elasticity measures the responsiveness of quantity demanded to changes in price. Along a linear demand curve, elasticity changes as we move from one point to another. At higher prices and quantities, demand tends to be more elastic, indicating that consumers are more sensitive to price changes. Conversely, at lower prices and quantities, demand becomes relatively inelastic, meaning consumers are less responsive to price changes. Therefore, statement A is incorrect.

B) If a firm decreases the price of its product, its total revenue must decrease.
Statement B suggests that decreasing the price of a product always results in a decrease in total revenue for a firm. However, this statement is not universally true. The impact of price changes on total revenue depends on the price elasticity of demand. If demand is elastic, meaning consumers are highly responsive to price changes, a decrease in price will lead to an increase in quantity demanded that outweighs the decrease in price. As a result, total revenue will increase. Conversely, if demand is inelastic, a decrease in price will result in a smaller increase in quantity demanded, causing total revenue to decrease. Therefore, statement B is incorrect as it oversimplifies the relationship between price changes and total revenue.

C) As we move down a demand curve, the price elasticity becomes relatively inelastic.
Statement C suggests that as we move down a demand curve, the price elasticity of demand becomes relatively inelastic. This statement is generally accurate. As we move down a demand curve, we encounter lower prices and higher quantities. At these lower price levels, consumers become less sensitive to price changes, making demand relatively inelastic. In other words, the percentage change in quantity demanded becomes proportionately smaller than the percentage change in price. Therefore, statement C is correct in describing the general trend of price elasticity along a demand curve.

D) As the price of X falls and we move down an individual’s demand curve for X, the money income of the individual also changes.
Statement D suggests that as the price of good X falls and we move down an individual’s demand curve for X, the individual’s money income also changes. This statement is not accurate. The movement along an individual’s demand curve for good X, caused by changes in price, does not directly influence the individual’s money income. The individual’s money income represents the total amount of money they have available to spend on goods and services. While changes in price may influence the individual’s purchasing power, they do not directly impact their money income. Therefore, statement D is incorrect.

Conclusion

In conclusion, statement A is incorrect, as the own price elasticity of demand varies along a linear demand curve. Statement B is also incorrect, as the impact of price changes on total revenue depends on the price elasticity of demand. Statement C is generally accurate, as demand becomes relatively inelastic as we move down a demand curve. Finally, statement D is incorrect, as the movement along an individual’s demand curve does not directly affect their money income. Understanding these concepts is essential for businesses and economists to make informed decisions regarding pricing strategies and demand analysis.