Question

When Elasticity of Demand is 1 at every point on the Demand Curve, this curve is known as:

• A. Perfectly inelastic demand curve
• B. Perfectly elastic demand curve
• C. Rectangular Hyperbola
• D. Greater than unitary demand curve

Answer 1

The Correct Option is C

In economics, the elasticity of demand measures how sensitive the quantity demanded of a good is to changes in its price. When elasticity of demand equals 1 at every point on the demand curve, it indicates unitary elastic demand. Under this condition, the demand curve is a Rectangular Hyperbola. 

This occurs because the percentage change in quantity demanded is exactly equal to the percentage change in price, ensuring that total revenue remains constant as price varies. Mathematically, this can be expressed as:

\(E_d = 1\)

Where \(E_d\) represents the price elasticity of demand.

On a graph, the rectangular hyperbola ensures that any price change is offset by a proportional change in quantity, maintaining a constant expenditure or total revenue.

Answer 2

A demand curve with unitary elasticity at every point is represented by a rectangular hyperbola. In this case, the price elasticity of demand (PED) is equal to one, meaning that the percentage change in quantity demanded is exactly equal to the percentage change in price, resulting in no change in total revenue.

On a rectangular hyperbola demand curve, as the price decreases, the quantity demanded increases proportionally, such that total revenue (price multiplied by quantity) remains constant along the entire curve. This is a characteristic of unitary elasticity, where any increase in quantity demanded is exactly offset by a decrease in price, and vice versa, ensuring that total revenue stays unchanged.

This kind of demand curve is theoretical and not commonly observed in real-world markets, but it is useful in illustrating the concept of unitary elasticity and the relationship between price, quantity demanded, and total revenue.