Elastic Demand

Elastic demand refers to an economic concept that states that the demand for a good or service changes with the fluctuations in its price. If a product has an elastic demand, it will have more buyers when its price goes down and vice-versa. Consumer durables are usually considered products that show the most deviation on an elastic demand graph.

The concept helps measure the extent to which a product or service’s demand is affected by external factors. It helps in deciding product pricing, inventory planning, marketing strategies, and expected returns. Despite the fact that it is beyond the control of the manufacturer, they have to ensure to plan according to its expected movements to ensure profitability and sustainability.

• Elastic demand states that a commodity's consumer demand spontaneously responds to its price change.
• The formula for the elasticity of demand = Percentage change in quantity/ Percentage change in demand.
• When elasticity is higher than 1, it signifies products have an elastic demand. Such a demand curve is relatively flattened towards the x-axis, reflecting high sensitivity to change.
• Luxury products, consumer durables and those commodities which have many substitutes experience high demand elasticity.
• Other than price, other determinants affect the demand, such as consumer income, personal taste, substitute commodities, etc.

Elastic demand reflects the change in a good or service’s demand against a determinant. The effect of price on demand is studied under the price elasticity of demand which relates to the law of demand. The law states that other factors being constant, a decrease in a good’s price will increase its demand and vice versa.

For example, luxury clothes have elastic demand under the price elasticity of demand. People usually rush to luxury brands when they announce discounts to buy more. But when we observe the reality, we realize that other factors such as consumer income, substitute goods, personal taste, etc., also affect the demand. A consumer could be addicted to a luxury brand of tea and buy it even after its price skyrockets.

To measure the reaction of demand, elasticity comes into the picture. The elasticity of demand measures the variability or extent to which the demand changes in response to a factor. The formula to measure if the demand is elastic or not is explained below.

Therefore, elastic demand is a key concept in economics and holds substantial importance. It signifies that consumers are highly responsive to price changes, impacting pricing strategies for businesses. Understanding elasticity aids in predicting market behavior, guiding investment decisions, and informing policy choices.

Policymakers consider it when implementing taxes or regulations, with implications for public health and revenue generation. In essence, the elastic demand calculator’s significance lies in its ability to optimize pricing, forecast market dynamics, and influence economic and business decisions.

Let us understand the formula for plotting an elastic demand graph that shall act as a basis for our understanding of the intricate details of the concept.

To find out if a product has elastic demand, we will need to apply the elasticity of demand formula. The formula for the elasticity of demand is as follows

Elasticity of Demand or Ed = Percentage change in quantity/ Percentage change in price

Percentage change in quantity = Change in Quantity/ Average Quantity

Change in quantity can be found by deducting old quantity from new quantity.

Percentage change in price = Change in Price/ Average Price

Change in price can be found by deducting old price from new price.

When we apply this formula, and the outcome is more than 1, it becomes the case of elastic demand. In other words, whenever the elasticity of demand is more than 1, the demand will be sensitive to changes.

Calculating elasticity helps businesses and policymakers understand consumer responsiveness, aiding in pricing decisions and policy formulation. Let us discuss the step-by-step process through the discussion below.

• Initial Data Collection: Gather data on the initial price (P1) and quantity demanded (Q1) of the product or service in question.
• Change in Price and Quantity: Identify the new price (P2) and the corresponding quantity demanded (Q2) after a price change.
• Calculate Percentage Change: Calculate the percentage change in price and quantity using the following formulas:
  • Percentage Change in Price = * 100%
  • Percentage Change in Quantity = * 100%
• Elasticity Calculation: Use the percentage changes to determine the price elasticity of demand (PED): PED = (Percentage Change in Quantity) / (Percentage Change in Price)
• Interpretation of Elasticity Value:
  • If PED > 1, it indicates elastic demand, meaning consumers are responsive to price changes.
  • If PED < 1, it implies inelastic demand, where consumers are less responsive to price changes.
  • If PED = 1, it represents unitary elasticity, signifying proportional changes in price and quantity demanded.

Let us discuss how the values derived from the elastic demand calculator look on a graph and let us also discuss the curves through the discussion below.

The elasticity of demand is above one when there is high responsiveness to change against a determinant such as price. This will also be seen in the graph. Under the price elasticity of demand, the elastic demand graph will have price on the y-axis and quantity on the x-axis. The demand curve will be relatively flattened towards the x-axis, showing high sensitivity to price.

When the demand is not sensitive to price, it will result in inelastic demand. The demand for necessary goods such as milk, electricity, fuel, medicines will not go down with an increase in price as people will buy them largely no matter what. They are an example of inelastic goods and have less than 1 elasticity.

Additionally, a product will have unitary elasticity if its demand varies in exact proportion to the percentage change in its price. Here, the elasticity of demand is one.

Finally, under the definition of perfectly elastic demand, the results will change. The change in a commodity’s price will result in an infinite change in its demand. As such, if the price goes down, the demand will rise to infinity and vice-versa. Here the demand curve will be parallel to the x-axis.

Various types of elastic demand exist, each depicting how consumers respond to price changes differently. These types include:

• Perfectly Elastic Demand:
  • In this scenario, consumers are extremely sensitive to price changes.
  • The demand curve is horizontal, indicating that any increase in price results in a complete loss of demand.
• Perfectly Inelastic Demand:
  • Here, consumers do not alter their demand regardless of price fluctuations.
  • The demand curve is vertical, signifying that price changes have no effect on the quantity demanded.
• Unitary Elastic Demand:
  • In this case, the percentage change in quantity demanded exactly matches the percentage change in price.
  • The demand curve has an elasticity coefficient of 1, demonstrating proportional responsiveness.
• Relatively Elastic Demand:
  • Consumers show a significant response to price changes.
  • The elasticity coefficient is greater than 1, indicating that quantity demanded changes more than proportionally to price changes.

Now that we understand the formula, how to calculate, and types of an elastic demand graph, let us apply the theoretical knowledge to practical application through the examples below.

Example #1

ABC Electronics initially sold 1500 LED televisions a year at $1000 per TV. The price of LED TV reduced to $900, and the demand increased to 1800 units. Find the elasticity of demand.

Percentage change in demand =

(1800-1500) / (1500+1800/2)

= 0.125

Percentage change in price = (900-1000) / (1000+900/2)

=0.10 (ignore the – sign)

Elasticity of Demand or Ed =0.125/0.10

Ed=1.25

Hence, the company experienced elastic demand since Ed˃1, signifying the change in demand is higher than the change in the price of LED TVs.

Example #2

XYZ Beverages Ltd. produces coffee. The initial price of coffee was $80 per kg, and the quantity demanded per month was 1200 kgs. The price rose to $100 per kg, but the quantity demanded decreased to 1150kgs. Find the elasticity of demand.

Percentage change in demand =

(1150-1200) / (1200+1150/ 2)

= 0.02

Percentage change in price =

(100-80) / (80+100) /2)

= 0.11 (ignore the – sign)

Ed = 0.02/0.11

Ed = 0.18

Since, Ed˂1, the change in demand is not that significant to the change in the price of coffee.

Except for or along with price, various other factors contribute to the change in demand for goods or services. The elasticity of demand is calculated for many of these factors too. These determinants are stated below:

1. Consumer Income: A downfall in the consumers' income results in decreased demand for a product or service. Say, John visited a cafe four times a month, but he restricted it to two due to a decline in his income.
2. Substitute Goods: The commodities with substitutes experience volatile demand since the consumer can always switch to substitutes if the product's price increases. For instance, if butter’s price increases, many will shift to margarine to not affect their budget.
3. Complementary Goods: If the price of a good rise, it will also affect the demand for its complementary. For example, if the price of vegetables becomes high, vegetarian food price will also go up in the restaurants. It will affect the demand of both.
4. Necessity: Even when the price of necessary goods like flour or rice goes up, their demands do not vary much. On the other hand, if luxury products or services such as royal vacation packages rise in price, their demand falls.
5. Time: Time is another essential factor; many times, a product's demand doesn't fall in the short run even after its price rise like iPhone's paid applications. However, the customer can plan to change the mobile phone in the long run to avoid the high costs of such apps.
6. Customer taste and preference: If consumers prefer a product, say a particular brand of clothing, they will keep buying it despite the price rise.

Elastic demand and inelastic demand represent two contrasting concepts in economics, each describing how consumers react to changes in the price of goods or services. Let us understand the differences through the comparison below.

Elastic Demand

• In elastic demand, consumers are highly responsive to price fluctuations.
• When prices rise, the quantity demanded decreases significantly, and when prices fall, the quantity demanded increases substantially.
• The price elasticity of demand (PED) is greater than 1, indicating a relatively large change in quantity compared to price changes.
• Common examples include luxury goods and non-essential items, where consumers can easily adjust their buying behavior based on price variations.

Inelastic Demand

• In inelastic demand, consumers are less responsive to price changes.
• Even if prices rise, the quantity demanded remains relatively stable, and if prices drop, the quantity demanded changes only slightly.
• The price elasticity of demand (PED) is less than 1, signifying that the quantity demanded changes less than proportionally to price changes.
• Essential goods like medications or basic utilities often exhibit inelastic demand, as consumers require these items regardless of price fluctuations.

This has been a guide to What is Elastic Demand. Here we explain its formula, types, examples, and curves, and compare it with inelastic demand. You can learn more about economics from the following articles –

• Top Inelastic Demand Examples
• Examples of Elasticity of Demand
• Formula of Cross Price Elasticity of Demand
• Giffen Goods