CFA Study Guide

Economics: Elastic & Inelastic Curves

Price vs. Quantity is a common chart for most economics curves. There are two basic curve shapes you will need to know that can be made with a chart like this. What they both illustrate is the general concept of demand/supply. The two types of elasticity curves are called either an Elastic curve or an Inelastic curve which by nature of their names you can tell are the exact opposites of each other in terms of how quantity is affected. The basic underlying fact is that, in terms of demand, as a price increases, quantity demanded decreases. Furthermore the shape of the curve (elastic or inelastic) tells you to what extent price has an effect on demand.

In an INelastic curve:
a large change in price really only affects the quantity demanded very little. Examples of this kind of curve are most often Gasoline, Cigarettes and Home heating oils - things that people need or will pay for no matter how the price fluctuates, and remember this also holds true to price decreases because a person only has so many cars to fill tanks on and so many cigarettes he can smoke in one day, so demand really stays more or less constant with these kinds of items and this is what makes the Inelastic curve more vertical. A large change in price really doesn’t make much movement in quantity demanded on the X axis.

Key Point:
A vertical curve = INelastic curve

You can see that it almost even looks like the chart could be made into the letter "N" if you try real hard.