The Business Post
Tuesday, January 18, 2022

Home ›› 20 Oct 2021 ›› Editorial

Demo AD

What is elastic demand?

20 Oct 2021 00:00:00 | Update: 20 Oct 2021 01:34:49
What is elastic demand?

Elastic demand occurs when the price of a good or service has a big effect on consumers’ demand. If the price goes down just a little, consumers will buy a lot more. If prices rise just a bit, they’ll stop buying as much and wait for prices to return to normal. Price is one of the five determinants of demand, but it doesn’t affect the demand for all goods and services equally. When price heavily affects demand, that good or service is said to have “elastic demand.” The name comes from the way economists think about the demand for that good or service—it stretches easily, and a slight price change results in massive changes to demand.

The law of demand guides the relationship between price and the quantity bought. It states that the quantity purchased has an inverse relationship with price. When prices rise, people buy less. The elasticity of demand tells you how much the amount bought decreases when the price increases. If a good or service has elastic demand, it means consumers will do a lot of comparison shopping. They do this when they aren’t desperate to have it or they don’t need it every day. They’ll also comparison shop when there are a lot of other similar choices.

You can visualize this phenomenon with a demand curve graph. In an elastic demand scenario, the quantity demanded will change much more than the price. When price is on the y-axis and demand is on the x-axis, the elastic demand curve will look lower and flatter than other types of demand. The more elastic the demand is, the flatter the curve will be. The demand curve—and any discussion about price elasticity—only shows how the quantity changes in response to price “ceteris paribus,” a Latin phrase that means “all other things being equal.” If one of the other determinants of demand changes, it will shift the entire demand curve.

To measure the elasticity of demand, divide the percentage change in quantity demanded by the percentage change in price. When this ratio gives you a result of more than one, that demand is considered elastic. Perfectly elastic demand is when the quantity demanded skyrockets to infinity when the price drops any amount. That, of course, could not happen in real life. However, many commodities approach that scenario because they are highly competitive. The price is essentially the only thing that matters. As an example of perfectly elastic demand, imagine that two stores sell identical ounces of gold. One sells it for $1,800 an ounce while the other one sells it for $1,799 an ounce. With perfectly elastic demand, no one would buy the more expensive gold. Instead, all consumers would buy gold from the dealer that sells it for less.

In the real-life situation of almost perfect elasticity, many people, but not all of them, will choose the cheaper gold over the more expensive one. Some may still pay more for gold because they like the other shop owner better, or the other shop is closer to their home and they don’t want to drive across town to the store with the cheaper gold.

A more realistic example of elastic demand is housing. There are so many different housing choices. People could live in a suburban home, a condo, or rent an apartment.

 

The Balance