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Elastic and Inelastic Demand

This document discusses the different types of price elasticity of demand including perfectly elastic, perfectly inelastic, unitary, elastic, and inelastic demand. It provides examples and diagrams to illustrate each type. Perfectly elastic demand means quantity demanded becomes zero with any price increase, while perfectly inelastic means quantity does not change with price changes. Unitary elasticity means percentage changes in quantity and price are equal. Elastic demand means quantity changes more than price, and inelastic means quantity changes less than price. Total expenditure and total revenue methods can also determine elasticity based on whether total spending increases, stays the same, or decreases with price changes.

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Yagya Raj Joshi
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335 views6 pages

Elastic and Inelastic Demand

This document discusses the different types of price elasticity of demand including perfectly elastic, perfectly inelastic, unitary, elastic, and inelastic demand. It provides examples and diagrams to illustrate each type. Perfectly elastic demand means quantity demanded becomes zero with any price increase, while perfectly inelastic means quantity does not change with price changes. Unitary elasticity means percentage changes in quantity and price are equal. Elastic demand means quantity changes more than price, and inelastic means quantity changes less than price. Total expenditure and total revenue methods can also determine elasticity based on whether total spending increases, stays the same, or decreases with price changes.

Uploaded by

Yagya Raj Joshi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BY Y R JOSHI

elastic and Inelastic Demand:


For example, a decline of 1% in price leads to 8% increase in the quantity demanded of a commodity. In such a case, the demand is said to elastic. There are other products where the quantity demanded is relatively unresponsive to price changes. A decline of 8% in price, for example, gives rise to 1% increase in quantity demanded. Demand here is said to be inelastic. The terms elastic and inelastic demand do not indicate the degree of responsiveness and unresponsiveness of the quantity demanded to a change in price. The economists therefore, group various degrees of elasticity of demand into five categories.

(1) Perfectly Elastic Demand:


A demand is perfectly elastic when a small increase in the price of a good its quantity to zero. Perfect elasticity implies that individual producers can sell all they want at a ruling price but cannot charge a higher price. If any producer tries to charge even one penny more, no one would buy his product. People would prefer to buy from another producer who sells the good at the prevailing market price of $4 per unit. A perfect elastic demand curve is illustrated in fig. 6.1.

Diagram:

It shows that the demand curve DD/ is a horizontal line which indicates that the quantity demanded is extremely (infinitely) response to price. Even a slight rise in price (say $4.02), drops the quantity demanded of a good to zero. The curve DD/ is infinitely elastic. This elasticity of demand as such is equal to infinity.

(2) Perfectly Inelastic Demand:


When the quantity demanded of a good dose not change at all to whatever change in price, the demand is said to be perfectly inelastic or the elasticity of demand is zero. For example, a 30% rise or fall in price leads to no change in the quantity demanded of a good. Ed = 0 30%

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BY Y R JOSHI

Ed = 0

In figure 6.2 a rise in price from OA to OC or fall in price from OC to OA causes no change (zero responsiveness) in the amount demanded. Ed = 0 p Ed = 0

(3) Unitary Elasticity of Demand:


When the quantity demanded of a good changes by exactly the same percentage as price, the demand is said to has a unitary elasticity. For example, a 30% change in price leads to 30% change quantity demand = 30% / 30% = 1.

One or a one percent change in price causes a response of exactly a one percent change in the quantity demand.

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BY Y R JOSHI

In this figure (6.3) DD/ demand curve with unitary elasticity shows that as the price falls from OA to OC, the quantity demanded increases from OB to OD. On DD/demand curve, the percentage change in price brings about an exactly equal percentage in quantity at all points a, b. The demand curve of elasticity is, therefore, a rectangular hyperbola. Ed = %q %p Ed = 1

(4) Elastic Demand:


If a one percent change in price causes greater than a one percent change in quantity demanded of a good, the demand is said to be elastic. Alternatively, we can say that the elasticity of demand is greater than. For example, if price of a good change by 10% and it brings a 20% change in demand, the price elasticity is greater than one. Ed = 20% 10% Ed = 2

In figure (6.4) DD curve is relatively elastic along its entire length. As the price falls from OA to OC, the demand of the good extends from OB to ON i.e., the increase in quantity demanded is more than proportionate to the fall in price. Ed = %q %p Ed > 1

(5) Inelastic Demand:


When a change in price causes a less than a proportionate change in quantity demand, demand is said to be inelastic.

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BY Y R JOSHI

The elasticity of a good is here less than I or less than unity. For example, a 30% change in price leads to 10% change in quantity demanded of a good, then: Ed = 10% 30% Ed = 1 3 Ed < 1

In figure (6.5) DD/ demand curve is relatively inelastic. As the price fall from OA to OC, the quantity demanded of the good increases from OB to ON units. The increase in the quantity demanded is here less than proportionate to the fall in price.

Total Expenditure Method/Total Revenue Method:


Definition, Schedule and Diagram:
The price elasticity can be measured by noting the changes in total expenditure brought about by changes in price and quantity demanded. (i) When with a percentage fall in price, the quantity demanded increases so much that it results in the increase in total expenditure, the demand is said to be elastic (Ed > 1).

For Example:
Price Per Unit ($) 20 10 Quantity Demanded 10 Pens 30 Pens Total Expenditure ($) 200.0 300.0

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BY Y R JOSHI

The figure (6.6) shows that at price of $20 per pen, the quantity demanded is ten pens, the total expenditure OABC ($200). When the price falls down to $10, the quantity demanded of pens is thirty. The total expenditure is OEFG ($300). Since OEFG is greater than OABC, it implies that change in quantity demanded is proportionately more than the change in price. Hence the demand is elastic (more than one) Ed > 1. (ii) When a percentage fall in price raises the quantity demanded so much as to leave the total expenditure unchanged, the elasticity of demand is said to be unitary (Ed = 1).

For Example:
Price Per Pen ($) 10 5 Quantity Demanded 30 60 Total Expenditure ($) 300 300

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BY Y R JOSHI
The figure (6.7) shows that at price of $10 per pen, the total expenditure is OABC ($300). At a lower price of $5, the total expenditure is OEFG ($300). Since OABC = OEFG, it implies that the change in quantity demanded is proportionately equal to change in price. So the price elasticity of demand is equal to one, i.e., Ed = 1. (iii) When a percentage fall in price raises the quantity demanded of a good so as to cause the total expenditure to decrease, the demand is said to be inelastic or less than one, i.e., Ed < 1.

For Example:
Price Per Pen ($) 5 2 Quantity Demanded 60 100 Total Expenditure ($) 300 200

In the fig (6.8) at a price of $5 per pen the quantity demanded is 50 pens. The total expenditure is OABC ($300). At a lower price of $2, the quantity demanded is 100 pens. The total expenditure is OEFG ($200). Since OEFG is smaller than OABC, this implies that the change in quantity demanded is proportionately less than the change in price. Hence price elasticity of demand is less than one or inelastic.

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