Examples and Definition of Elastic Demand
If all other variables remain constant, the percent of change in demand divided by the percent of change in price indicates whether the demand for a good or service is elastic or inelastic. An item is neither elastic nor inelastic if the change in price changes according to the change in demand. In other words, if a product’s demand varies more than its price, it has elastic demand.
Imagine that identical gold ounces are sold in two different locations as an illustration of fully elastic demand. It is offered by one for $1,800 per ounce and by another for $1,799 per ounce. No one would purchase the more expensive gold if demand for it were totally elastic. Everyone would instead purchase gold from the merchant who offers it at a lower price.
One of the five factors that determine demand is price, although not all products and services are affected by price equally. A good or service is said to have “elastic demand” when pricing has a significant impact on demand. The name derives from how economists see the demand for that commodity or service, which is said to be elastic and responsive to changes in price.
In a situation with almost perfect elasticities, some people might still choose to pay more for gold if they prefer the owner of the other business or it is located closer to their home, saving them the trouble of traveling to the store with the more affordable gold.
Housing is a more concrete illustration of elastic demand. There are numerous accommodation options available. A person could rent an apartment, a condo, or a suburban property. They might live alone, with a partner, in a shared apartment, or with relatives. People are not required to pay a set price because there are so many possibilities.
Demand for clothing is elastic as well. Although everyone needs to wear clothes, there are numerous options for both the type of clothing one wants to wear and the price they are willing to pay. When certain retailers run sales, other retailers must reduce their clothes prices to keep up with demand. During the Great Recession, second-hand shops that provided high-quality used apparel at substantial discounts took the place of many clothing stores.
Elastic Demand: How Does It Operate?
The link between price and quantity desired is governed by the law of demand. It claims that the link between quantity purchased and price is inverse. People purchase less as prices increase. You may find out how much less is purchased as a price rises using the elasticity of demand.
According to the rule of demand, if an item’s price rises, less people should want it. Demand elasticity is determined using the amount of change expressed as a percentage. To determine it, the change in price is contrasted with the change in demand. The item is deemed to have unified elasticity—price and demand that fluctuate proportionally—if the comparison result is one. It is elastic if it is greater than one; it is inelastic if it is less than one.
For instance, you would divide the change in demand by the change in price if the price of widgets increased by 1% and the demand decreased by 1%:
.01 ÷ .01 = 1
In this scenario, widgets have unified flexibility. However, if demand decreased by 5% and the price of widgets increased by 1%, you would get:
.05 ÷ .01 = 5
Widgets are elastic in this situation because the price change has a significant impact on their demand. Since retailers and suppliers cannot corner the market with exorbitant prices due to the elastic demand for widgets, consumers will shop around for the best deals.
A Demand Curve Graph’s Use
An illustration of the demand curve can show how elastic the demand is. The amount demanded fluctuates significantly more than the price under an elastic demand scenario. The elastic demand curve will appear lower and flatter than other types of demand when the price is on the y-axis and demand is on the x-axis. The demand curve will be flatter the more elastic the demand is.
Only how the quantity wanted alters in response to price, ceteris paribus, is shown by the demand curve and any discussion of price elasticity. The Latin phrase “other things being equal” means just that. In terms of economics, it relates to how something changes when all other influencing factors stay the same. The entire demand curve may alter and distort perceptions of elasticity if one of the other demand factors changes.
When the quantity sought increases to infinity when the price decreases by any amount, this is known as perfectly elastic demand. In real life, this is not something that would occur. Due to their intense competition, many commodities, however, bridge the gap between elastic and absolutely elastic. For these things, the price is practically the only factor that matters.