Because demand curves are usually downward sloping, the price elasticity of demand is:

The price elasticity of a product describes how sensitive suppliers and buyers are to changes in price. It doesn't change in relation to supply and demand, but it defines the slope of each curve.

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Related articles
What is the elasticity of a downward sloping demand curve?
Why is a demand curve usually downward sloping?
When demand curve is downward sloping its slope is positive?

A product with high price elasticity of demand will see demand fall sharply when prices rise. For the product with high elasticity of demand, the downward-sloping demand curve appears flatter, and for every change in price, there is a large change to the quantity demanded. A demand curve for a product with low elasticity appears to be steeper, because the quantity demanded doesn't change much, even if prices do. Products with low price elasticity are described as being inelastic.

Products with high price elasticity are generally non-staple goods. For example, the demand for teeth-whitening kits may be highly dependent on price and thus fairly elastic. The demand for toothpaste, on the other hand, might be relatively inelastic regardless of whether the price changes. A key factor affecting demand elasticity includes the availability of substitute goods, or goods that are very close to the product in question.

The time a consumer has to ponder options and the classification of good also matter. For example, a consumer might drive around shopping for the best deal on items that consistently take large portions of a budget, such as groceries, while ignoring price differentials for small and relatively infrequent purchases, such as shoe polish.

Similarly, a product with high price elasticity of supply has a flatter, upward-sloping curve. A product with a low elasticity of supply has a steeper curve. Price elasticity of supply can be calculated by dividing the percentage change in supply by the percentage change in price. The same factors that affect the elasticity of demand affect supply elasticity, namely the availability of substitute inputs and the time needed to make changes to production.

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Eric J. Levin (Department of Economics, University of Stirling, Stirling, UK)

Robert E. Wright (Department of Economics, University of Stirling, Stirling, UK Centre for Economic Policy Research (CEPR), London, UK Institute for the Study of Labour (IZA), University of Bonn, Bonn, Germany)

Abstract

Purpose

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The purpose of the analysis is to estimate price elasticities of demand for individual FTSE‐100 stocks between 1 August 1994 and 31 July 1995.

Design/methodology/approach

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This paper measures excess demand in order to measure the slope of the demand curve for individual stocks. An econometric approach is adopted that models the slope of the excess demand curve within an econometric framework using signed market maker transactions data between 1 August 1994 and 31 July 1995.

Findings

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The findings confirm that the demand curves for individual stocks do slope downwards. For example, the mean estimated percentage fall in stock price caused by a new share issue that is 1 per cent of the existing number of outstanding shares is −5.6.

Practical implications

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Downward sloping demand curves pose difficulties for theories in finance that rely on the law of one price and price‐takers in competitive markets. For example, the dividend policy and capital structure irrelevance theorems of corporate finance, and the efficient markets hypothesis assumption that the price of a stock is determined only by information about future cash flows and the discount rate are not consistent with a downward sloping demand curve.

Originality/value

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The slope of the demand curve is estimated using an econometric model and market makers' transactions data for specific stocks. This approach identifies observable unexpected shifts in the demand for a stock as unexpected changes in market makers' inventories. This approach is superior to event studies because it provides multiple observations that enable the slope of the demand curve to be quantified with sufficient confidence to calculate the price elasticity of demand for the stock.

Keywords

Demand
Stocks and shares
Econometrics

Citation

Levin, E.J. and Wright, R.E. (2006), "Downwards sloping demand curves for stock?", Studies in Economics and Finance, Vol. 23 No. 1, pp. 51-74. https://doi.org/10.1108/10867370610661945

Publisher

Emerald Group Publishing Limited

What is the elasticity of a downward sloping demand curve?

The price elasticity in demand is defined as the percentage change in quantity demanded divided by the percentage change in price. Since the demand curve is normally downward sloping, the price elasticity of demand is usually a negative number.

Why is a demand curve usually downward sloping?

According to this principle, the marginal utility of a commodity reduces when the quantity of goods is more. Consequently, when the quantity is more, the prices will fall and demand will increase. Hence, consumers will demand more goods when prices are less. This is why the demand curve slopes downwards.

When demand curve is downward sloping its slope is positive?

False, a demand curve does not have a positive slope. Explanation: The demand curve has a negative slope as it is a downward sloping curve from left to right. The various reasons for a negative slope includes diminishing marginal utility, several uses of a good, substitution effect and income effect.