Elastic Demand is when the price of an item or service has an impact on consumer demand. Consumers will purchase more if the price drops a bit. If prices go up a little, consumers will stop buying and wait until prices return to normal.
The Key Takeaways
- Elastic demand is when the quantity demanded of a product or a service changes more than its price.
- Inelastic Demand is the opposite of elastic, and occurs when consumers purchase the same amount regardless of price.
- The demand curve shows the response of quantity demanded to changes in price. Demand is more elastic if the curve is flatter.
- Non-essential goods are items with elastic demand.
Definition and examples of elastic demand
If all other factors are the same, you can determine if a service or product is elastic or not by dividing its percent of change in demand by its percentage of change in price. The price of an item will change proportionally to the change in its demand. This is neither elastic or inelastic. A product has elastic demand when its demand changes more rapidly than its price.
Imagine that two shops sell the same amount of gold. Two stores sell the same ounces of gold, one for $1800 and another for $1799 per ounce. If gold demand were elastic, then no one would purchase the more expensive gold. Everyone would instead buy gold from the dealer who sells it at a lower price.
Price is one of five factors that determine demand. However, it does not affect demand equally for all goods or services. ” 1 The term comes from how economists view the demand for the good or service. It is elastic and can be affected by a small price change.
Some people will still pay more than others for gold in a situation where almost is perfect. This could be because they prefer the owner of the other store or that the shop they choose is nearer to their house.
Note:
You can refer to elastic demand either as a demand type (when price changes outpace demand changes) or in terms of relativeness (i.e. this product’s demands are more elastic than those of another product).
Housing is a more realistic example of elastic housing demand. Housing options are numerous. You can rent an apartment, live in a condominium, or own a suburban house. People could choose to live alone, with a roommate, with their partner or family. There are many choices, so people do not have to pay any specific price.
Clothing is also in high demand. Clothing is a necessity for everyone, but they have many options when it comes to what they wear and the amount they spend. In order to keep up with demand, some clothing stores will offer sales. During the Great Recession many clothing shops were replaced with second-hand clothing stores, which offered high quality clothing at deeply discounted prices. 3
What is elastic demand?
The Law of Demand governs the relationship between the price and quantity demanded. The law of demand states that quantity bought has a negative relationship with price. People buy less when prices increase. The elasticity tells you the amount of money that is spent when prices increase.
According to the law of supply, if a product’s price rises, then demand should fall. Demand is determined by the amount of change measured in percentages. To determine if demand is elastic, the change in demand and price are compared. The item has unified elasticity if the result of the comparison is 1. This means that both price and demand change in proportion. 5 If the result is less than 1, it’s inelastic.
Divide the difference in demand by the increase in price, for example, if widget prices went up 1% and demand fell 1%.
.01 / .01 = 1
In this case, widgets have a unified elasticity. If the demand for widgets dropped by 5% and the price of widgets increased by 1%, then you would get:
.05 / .01 = 5
In this instance, widgets have elastic demand, as their demand has changed dramatically with price changes. Since widgets are elastic, the demand for them will fluctuate with the price.
How to use a demand curve graph
This elastic demand can be visualized with a curve graph. In a scenario of elastic demand, the quantity demanded is more affected by price than it is the price itself. The elastic demand curve is flatter and lower than other demand types when the price is shown on the y axis and the demand on the vertical axis. The flatter the curve, the more elastic demand will be. 6
The demand curve, and any discussion of price elasticity, only shows how quantity demanded changes as a result of price . This Latin phrase is “other things being the same.” It is a term used in economics to describe how something will be affected if all the other factors that affect it are kept constant. The entire demand curve may change if one of the other factors determining demand changes. This can skew perceptions of elasticity.
Note:
The demand curve is built on the Demand Schedule which shows the same data as a table. This table shows how many units are expected to be purchased at each price.
When the price is reduced, the demand for the product increases to an infinite amount. It is unlikely that this would ever happen in reality. Many commodities are close to being elastic because they’re highly competitive. For these products, the price is essentially all that matters.
Elastic Demand vs. inelastic demand
| Elastic Demand vs. inelastic demand | |
|---|---|
| Elastic Demand | Inelastic demand |
| Demand is more important than price | Demand and price changes are more important than each other |
| This is often the case when consumers have many choices for products and services. | This is often the case for products and services that consumers have limited alternatives to. |
| Examples include luxuries | Basic goods are examples. |
5 When demand is elastic, it changes more than the price. Inelastic demand changes more than the price. A product has inelastic demands when consumers will tolerate larger price changes before changing their behavior. Inelastic demand can cause a sudden price increase, but the consumer is unlikely to look for alternatives.
Inelastic demand is also present for some goods, such as staple foods. You would be forced to pay more if the price of staples such as fruits, vegetables, meats and poultry went up.
Consumers have a wide range of options when it comes to non-essentials such as imitations and off-brands. They can also choose not to buy anything at all.
