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Elastic demand means that demand for a product is sensitive to price changes. For example, if the selling price of a product is increased, there will be fewer units sold. If the selling price of a product decreases, there will be an increase in the number of units sold. Elastic demand is also referred to as the price elasticity of demand. The term inelastic demand means that the demand for a product is not sensitive to price changes.Elastic demand is a major concern for a manufacturer that attempts to set product prices based on costs. For instance, if the manufacturer's production and sales have declined and it fails to cut fixed costs, the manufacturer could be worse off by increasing selling prices. Use the search box on AccountingCoach.com for our Q&A on death spiral which is pertinent to elastic demand.
In short Elastic Demand refers to, demand of certain product is sensitive to changes in variables that affect that affects it . the variable could be incom , price , e.tc.
The demand that changes relative to price changes.
Elastic demand means that consumers buy a lot more products in response to a price change.
Degrees of Elasticity of Demand:
We have stated demand for a product is sensitive or responsive to price change. The variation in demand is, however, not uniform with a change in price. In case of some products, a small change in price leads to a relatively larger change in quantity demanded.
a) Elastic and Inelastic Demand:
For example, a decline of1% in price leads to8% 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 of8% in price, for example, gives rise to1% 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.
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.
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, a30% rise or fall in price leads to no change in the quantity demanded of a good.
In figure 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.
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, a30% change in price leads to30% 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.
In this figure 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.
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 by10% and it brings a20% change in demand, the price elasticity is greater than one.
In figure 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.
When a change in price causes a less than a proportionate change in quantity demand, demand is said to be inelastic.
The elasticity of a good is here less than I or less than unity. For example, a30% change in price leads to10% change in quantity demanded of a good, then:
In figure, 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.
Note: It may here note that the slope of a demand curve is not a reliable indicator of elasticity. A flat slope of a demand curve must not mean elastic demand. Similarly, a steep slope on demand curve must not necessarily mean inelastic demand.
The reason is that the slope is expressed in terms of units of the problem. If we change the units of problem, we can get a different slope of the demand curve. The elasticity, on the other hand, is the percentage change in quantity demanded to the corresponding percentage change in price.
It refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors.
