Demand is a crucial concept in economics, referring to the amount of a good or service that consumers are willing and able to buy at different prices. While there are many factors that influence demand, one of the most important is price elasticity, which measures the responsiveness of demand to changes in price.
In this object, we will discover the concepts of elastic and inelastic demand, examining what they mean, how they are calculated, and why they matter for businesses and policymakers.
What is Elastic Demand?
Elastic demand occurs when a small change in price leads to a proportionally larger change in the quantity demanded. This means that consumers are highly sensitive to changes in price, and are likely to reduce their purchases significantly if the price increases even slightly.
One way to calculate the elasticity of demand is to use the formula:
Elasticity of Demand = (% change in quantity demanded) / (% change in price)
If the result of this calculation is greater than 1, demand is considered to be elastic. For example, if a 10% increase in price leads to a 20% decrease in quantity demanded, the elasticity of demand would be:
Elasticity of Demand = (-20%/10%) = -2
This negative value indicates that demand is elastic, meaning that the quantity demanded is highly responsive to changes in price.
Why Does Elastic Demand Matter?
Elastic demand is important for businesses and policymakers to understand because it can have a significant impact on market outcomes. For example, if a business increases the price of its product and demand is highly elastic, it is likely that consumers will reduce their purchases, causing the business to lose revenue. Similarly, if a government imposes a tax on a good with elastic demand, it may reduce the quantity demanded significantly and fail to raise much revenue.
On the other hand, if a business lowers its price and demand is highly elastic, it may be able to increase its market share and revenue. This is because the price decrease will encourage consumers to switch from competing products, leading to a larger increase in quantity demanded than the decrease in price.
What is Inelastic Demand?
In contrast to elastic demand, inelastic demand occurs when a change in price leads to a proportionally smaller change in the quantity demanded. This means that consumers are relatively insensitive to changes in price, and are likely to continue buying the same quantity even if the price increases significantly.
To calculate the elasticity of demand in this case, we use the same formula as before:
Elasticity of Demand = (% change in quantity demanded) / (% change in price)
If the result of this calculation is less than 1, demand is considered to be inelastic. For example, if a 10% increase in price leads to only a 5% decrease in quantity demanded, the elasticity of demand would be:
Elasticity of Demand = (-5%/10%) = -0.5
This negative value indicates that demand is inelastic, meaning that the quantity demanded is relatively unresponsive to changes in price.
Why Does Inelastic Demand Matter?
Inelastic demand is also important for businesses and policymakers to understand because it can have a significant impact on market outcomes. In particular, if a business increases the price of its product and demand is highly inelastic, it is likely that consumers will continue buying the same quantity, allowing the business to increase its revenue.Similarly, if a government imposes a tax on a good with inelastic demand, it may reduce the quantity demanded only slightly while raising a significant amount of revenue.
What is the Difference between Elastic and Inelastic Demand?
In the world of economics, the difference between elastic and inelastic demand is important for business people and policymakers. It helps determine how much a price change will impact revenue. Some commodities are more elastic than others, based on the nature of their products. Some examples are soft drinks, technology, and clothing. Simply put, demand refers to the quantity of a product or service that consumers are willing and able to buy at a given price. However, not all demand is created equal. In economics, we distinguish between elastic and inelastic demand, two terms that describe how consumers respond to changes in the price of a good or service.
Elastic Demand
Elastic demand refers to a situation where a change in price leads to a proportionately larger change in the quantity of the good or service demanded. In other words, when the price of a good or service increases, consumers reduce their demand for it by a relatively large amount. Conversely, when the price of the good or service decreases, consumers increase their demand for it by a relatively large amount.
One common example of elastic demand is gasoline. As the price of gasoline increases, consumers tend to reduce their consumption of it. They may choose to carpool, use public transportation, or simply drive less. Conversely, when the price of gasoline decreases, consumers may choose to drive more, take longer trips, or buy larger vehicles. In this case, a small change in price can lead to a relatively large change in the quantity of gasoline demanded.
Inelastic Demand
Inelastic demand, on the other hand, refers to a situation where a change in price leads to a proportionately smaller change in the quantity of the good or service demanded. In other words, when the price of a good or service increases, consumers reduce their demand for it by a relatively small amount. Conversely, when the price of the good or service decreases, consumers increase their demand for it by a relatively small amount.
One common example of inelastic demand is cigarettes. Cigarettes are addictive and many smokers are willing to pay a high price for them regardless of the cost. As a result, when the price of cigarettes increases, smokers may reduce their consumption slightly, but are unlikely to quit entirely. Similarly, when the price of cigarettes decreases, smokers may increase their consumption slightly, but are unlikely to become heavy smokers.
Conclusion
The elasticity of demand measures how much a particular product’s quantity demanded in response to a change in one or more demand determinants. It can be defined as the percentage change in a given quantity demanded divided by a percentage change in another economic variable. A variety of factors determines the elasticity of demand. These include market definition, time horizon, availability of substitutes, and luxuries versus necessities.
