Price elasticity of demand is a measure of the change in quantity demanded or purchased of a product in relation to its price change. It may also be defined as the ratio of the percentage change in quantity demanded to the percentage change in price of particular commodity. There are two major types of elasticity of demand, that is, elastic and inelastic demand. Price is the most common economic factor used when determining elasticity or inelasticity. Other factors include income level, consumer’s habit, and substitute availability.
The formula for the coefficient of price elasticity of demand for a good is:
e(p)= (∆Q )/ (∆P) Where P is the price of the of goods demanded whereas Q is the quantity of the goods demanded. From this formula, price elasticity of demand can still be described as the change in demand for a commodity due to a given change in the price of that commodity.
From the calculation, if the coefficient of elasticity of demand is greater than or equal to one, then the demand is elastic whereas, if the coefficient of elasticity of demand is less than one, the demand is said to be inelastic.
Other than elastic and inelastic demand, other types of elasticity of demand include:
- Perfectly elastic demand
- Unitary Inelastic demand
- Perfectly inelastic demand
Perfect inelastic demand means that prices or quantities are fixed and are not affected by the other variable whereas unitary demand occurs when a change in price causes a perfectly proportional change in quantity demanded.
What Is Elastic Demand?
Demand is considered elastic when a relatively small or large change in price is accompanied by a disproportionately larger change in the quantity demanded. Goods of ostentation or luxurious commodities usually have elastic demand; they include Tesco bread, daily express, Porsche sports car, Heinz soup, Kit kat chocolate bar, Samsung TV iphone or ipad etc. When the prices of these products increases, the quantity demanded will decrease because people will not be willing to spend more dollars on these products. At the same time, when the price of the commodity decreases, the quantity demanded will increase.
What You Need To Know About Elastic Demand
- Demand is considered elastic when a relatively small or large change in price is accompanied by a disproportionately larger change in the quantity demanded.
- When the demand is elastic, the curve is shallow.
- Luxurious commodities have elastic demand.
- In elastic demand, the price and total revenue move in opposite direction.
- The elasticity coefficient/quotient is usually calculated as a ratio of percentage change in the price of the commodity to the percentage change in price, out of the calculation, if the coefficient of elasticity of demand is greater than or equal to one, then the demand is elastic.
- Substitute for the product or commodity will be available.
- In elastic demand, the consumer is more sensitive to price changes.
What Is Inelastic Demand?
Demand is inelastic when a relatively large or small change in price is accompanied by a disproportionately smaller change in the quantity demanded. Goods of necessity usually have inelastic demand; they include food, gasoline, salt, goods produced by a monopoly, prescription drugs and tobacco products etc. When the price for these commodities increases, people will still purchase roughly the same amount of the goods or service as they did prior to the increase because their needs stay the same. A similar situation prevails when there is a decrease in price, the demand will not increase substantially because consumers only have a limited need for the products.
What You Need To Know Inelastic Demand
- Demand is inelastic when a relatively large or small change in price is accompanied by a disproportionately smaller change in the quantity demanded.
- When the demand is inelastic, the slope will be steep.
- Goods of necessity such as food, prescription drugs, gasoline etc have inelastic demand.
- With inelastic demand, the price and total revenue moves in the same direction.
- The elasticity coefficient/quotient is usually calculated as a ratio of percentage change in the price of the commodity to the percentage change in price, out of the calculation, if the coefficient of elasticity of demand is less than one, the demand is said to be inelastic.
- Substitute for the product are less or unavailable.
- In inelastic demand, the consumer is less sensitive to price changes.
Difference Between Elastic And Inelastic Demand In Tabular Form
| BASIS OF COMPARISON | ELASTICITY OF DEMAND | INELASTIC DEMAND |
| Demand is considered elastic when a relatively small or large change in price is accompanied by a disproportionately larger change in the quantity demanded. | Demand is inelastic when a relatively large or small change in price is accompanied by a disproportionately smaller change in the quantity demanded | |
| Elasticity Curve | When the demand is elastic, the curve is shallow. | When the demand is inelastic, the slope will be steep. |
| Commodities | Luxurious commodities have elastic demand. | Necessity commodities have inelastic demand. |
| Price & Total Revenue | In elastic demand, the price and total revenue move in opposite direction. | With inelastic demand, the price and total revenue moves in the same direction. |
| Elasticity Coefficient/Quotient | The elasticity coefficient/quotient for elastic demand is greater than or equal to one. | Elasticity coefficient/quotient for inelastic demand is less than one. |
| Substitute For Product | Substitute for the product or commodity will be available. | Substitute for the product are less or unavailable. |
| Consumer | The consumer is more sensitive to price changes. | The consumer is less sensitive to price changes. |