When demand for a commodity is perfectly in elastic an increase in price by 2% leads to increase in quantity demanded by?

Elasticity of demand is an important variation on the concept of demand. Demand can be classified as elastic, inelastic or unitary.

An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small.
The formula for computing elasticity of demand is:

(Q1 – Q2) / (Q1 + Q2)     
(P1 – P2) / (P1 + P2)

If the formula creates an absolute value greater than 1, the demand is elastic. In other words, quantity changes faster than price. If the value is less than 1, demand is inelastic. In other words, quantity changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price.

Elastic Demand

Elasticity of demand is illustrated in Figure 1. Note that a change in price results in a large change in quantity demanded. An example of products with an elastic demand is consumer durables. These are items that are purchased infrequently, like a washing machine or an automobile, and can be postponed if price rises. For example, automobile rebates have been very successful in increasing automobile sales by reducing price.

Close substitutes for a product affect the elasticity of demand. If another product can easily be substituted for your product, consumers will quickly switch to the other product if the price of your product rises or the price of the other product declines. For example, beef, pork and poultry are all meat products. The declining price of poultry in recent years has caused the consumption of poultry to increase, at the expense of beef and pork. So products with close substitutes tend to have elastic demand.

An example of computing elasticity of demand using the formula is shown in Example 1. When the price decreases from $10 per unit to $8 per unit, the quantity sold increases from 30 units to 50 units. The elasticity coefficient is 2.25.

Inelastic Demand

Inelastic demand is shown in Figure 2. Note that a change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not very responsive to changes in price. Examples of this are necessities like food and fuel. Consumers will not reduce their food purchases if food prices rise, although there may be shifts in the types of food they purchase. Also, consumers will not greatly change their driving behavior if gasoline prices rise.

An example of computing inelasticity of demand using the formula above is shown in Example 2. When the price decreases from $12 to $6 (50%), the quantity of demand increases from 40 to only 50 (25%). The elasticity coefficient is .33.

This does not mean that the demand for an individual producer is inelastic. For example, a rise in the price of gasoline at all stations may not reduce gasoline sales significantly. However, a rise of an individual station’s price will significantly affect that station’s sales.

Unitary Elasticity

If the elasticity coefficient is equal to one, demand is unitarily elastic as shown in Figure 3. For example, a 10% quantity change divided by a 10% price change is one. This means that a 1% change in quantity occurs for every 1% change in price.

Don Hofstrand, retired extension value added agriculture specialist,

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Perfectly inelastic demand

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There are two extreme cases of elasticity: when elasticity equals zero and when it’s infinite. We will describe each case.

Infinite elasticity or perfect elasticity refers to the extreme case in which either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all. In both cases, the supply curve and the demand curve are horizontal, as shown in Figure 1, below.

Perfectly elastic supply is unrealistic; however, the curve can be explained using a little imagination. If supply is perfectly elastic, it means that any change in price will result in an infinite amount of change in quantity. Suppose that you baked delicious cookies and your costs, including inputs and time, were $3 per cookie. At $3, you would be willing to sell as many cookies as you could. You would not sell a single cookie if the price were any lower than $3, and if price were above $3, you would sell an infinite amount. In summary, your supply curve would be perfectly elastic at a price of $3, and any change in price would result in a change in quantity supplied to infinity or zero, depending on whether price increased or decreased, respectively.

Similarly, perfectly elastic demand is an extreme example. Perfect elastic demand means that quantity demanded will increase to infinity when the price decreases, and quantity demanded will decrease to zero when price increases. When consumers are extremely sensitive to changes in price, you can think about perfectly elastic demand as “all or nothing.” For example, if the price of cruises to the Caribbean decreased, everyone would buy tickets (i.e., quantity demanded would increase to infinity), and if the price of cruises to the Caribbean increased, not a single person would be on the boat (i.e., quantity demanded would decrease to zero).

Figure 1. Infinite Elasticity. The horizontal lines show that an infinite quantity will be demanded or supplied at a specific price. This illustrates the cases of a perfectly (or infinitely) elastic demand curve and supply curve. The quantity supplied or demanded is extremely responsive to price changes, moving from zero for prices close to P to infinite when prices reach P.

Zero elasticity or perfect inelasticity, as depicted in Figure 2, refers to the extreme case in which a percentage change in price, no matter how large, results in zero change in quantity supplied or demanded.

While a perfectly inelastic supply is an extreme example, goods with limited supply of inputs are likely to feature highly inelastic supply curves. Consider housing in prime locations such as apartments facing Central Park in New York City or beachfront property in Southern California. If housing prices increase for beachfront property in Southern California, there is a fixed amount of land, and only so many houses can be squeezed in along the beach. If housing prices decrease for Central Park–facing apartments, sellers are not going to bulldoze the buildings. Perfectly inelastic supply means that quantity supplied remains the same when price increases or decreases. Sellers are completely unresponsive to changes in price.

Similarly, while perfectly inelastic demand is an extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves. This is the case with life-saving prescription drugs, for example. Consider a person with kidney failure who needs insulin to stay alive. A specific quantity of insulin is prescribed to the patient. If the price of insulin decreases, the patient can’t stock up and save it for the future. If the price of insulin increases, the patient will continue to purchase the same quantity needed to stay alive. Perfectly inelastic demand means that quantity demanded remains the same when price increases or decreases. Consumers are completely unresponsive to changes in price.

Figure 2. Zero Elasticity. The vertical supply curve and vertical demand curve show that there will be zero percentage change in quantity (a) supplied or (b) demanded, regardless of the price. This illustrates the case of zero elasticity (or perfect inelasticity). The quantity supplied or demanded is not responsive to price changes.

Self Check: Calculating Price Elasticity

Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

You’ll have more success on the Self Check if you’ve completed the four Readings in this section.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.