Price elasticity of import demand

 

Let h be the price elasticity of import demand, i.e.,

 

                                                 

 

Balance of trade requires

                                                                    

 

Thus,

                                 

Figure 4a shows that when the home offer curve is negatively sloped, NO is always shorter than MO, and the price elasticity of home country's import demand is greater than one (point F). At any point on the offer curve, one can draw a tangent line, which generates a triangle, FMN. When the home offer curve is vertical (at point F'), MO coincides with NO, and the elasticity is unity.

When the home offer curve is positively sloped (point F"), NO is greater than MO, and the elasticity of import demand is less than unity, i.e., home country's import demand is price inelastic.

Finally, when a country's offer curve is a ray from the origin, the line labeled FN coincides with FO, i.e., NO is zero, and the ratio MO/NO becomes infinite. That is, the country's import demand is infinitely elastic (a horizontal import demand curve).