Calculation of Elasticity of Demand
Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. There are five key cases of elasticity:
Five Cases of Elasticity of Demand
Perfectly Elastic Demand
-
- Demand is perfectly elastic when a very insignificant change in price leads to an infinite change in quantity demanded.
- A small fall in price causes demand to rise infinitely, while a small rise in price reduces demand to zero.
- This is a theoretical case and not observed in real life.
- Elasticity: Infinity.
Perfectly Inelastic Demand
-
- Demand is perfectly inelastic when a change in price produces no change in the quantity demanded.
- The quantity demanded remains constant regardless of price changes.
- Elasticity: Zero.
Relatively Elastic Demand
-
- Demand is relatively elastic when a small change in price causes a greater change in quantity demanded.
- A proportionate change in price leads to a more than proportionate change in quantity demanded.
- Example: If the price changes by 10%, the quantity demanded changes by more than 10% (e.g., 25%).
- The demand curve is relatively flatter.
- Elasticity: Greater than 1.
Relatively Inelastic Demand
-
- Demand is relatively inelastic when a greater change in price leads to a smaller change in quantity demanded.
- A proportionate change in price is greater than the proportionate change in quantity demanded.
- Example: If the price falls by 20%, the quantity demanded rises by less than 20% (e.g., 15%).
- Elasticity: Less than 1.
Unitary Elastic Demand
-
- Demand is unitary elastic when a change in price produces exactly the same percentage change in quantity demanded.
- Example: If the price falls by 25%, the quantity demanded rises by 25%.
- The demand curve is shaped like a rectangular hyperbola.
- Elasticity: Exactly 1.
