The demand curve of a market represents the responsiveness of consumers to price changes to a good. The flatter the slope of a demand curve, the higher the responsiveness in quantity demanded for a price change. A horizontal demand curve is used to represent a demand curve with a slope of zero. A change of price is impossible in this market due to the market competition and perfect substitution between suppliers.
The quantity demanded of a good is the amount a market wants to purchase of a good at a certain price. There is an inverse relationship between price and quantity demanded. A price increase will lower demand and a price decrease will increase demand. This relationship is plotted on the demand curve. The demand curve is a negatively sloped curve to illustrate the inverse relationship between price and quantity demanded. On the demand curve graph, price is on the vertical (Y) axis and quantity is on the horizontal (X) axis.
The price elasticity of demand is a calculation to measure the percentage change in quantity demanded caused by a change in price. Elasticity is calculated by dividing the percentage change in quantity by the percentage change in price. A curve with elasticity greater than one is considered elastic, whereas a curve with elasticity less than one is considered in inelastic. Elastic goods are more responsive to price changes than inelastic goods.
The flatter the slope of a demand curve, the higher its relative elasticity. This is seen on the demand curve graph, as a flatter curve will show a much greater change to quantity for a small change on the price versus a steep curve. A horizontal demand curve is a flat curve with a slope of zero. It is a perfectly elastic demand curve. Because the slope of the curve is zero, it is impossible for the price to change in the market.
A horizontal demand curve is used to represent a market where consumers have a choice between a large group offering a nearly identical product. The easy substitution between suppliers prevents prices from being raised because consumers will flock to a competitor. Prices cannot drop, either, because an under-priced good would receive a flock of new customers, raising costs and prices. A perfectly elastic and horizontal demand curve does not exist in real life but is used to better understand highly competitive markets.