Introduction

It is necessary to review or recall (repeat) the relationship between demand and price. “Demand has inverse relationship with price”. That is, a rise in price causes a fall in quantity demanded, and vice versa. And to what extent does demand react or respond to changes in price. Does a small change in price cause a large, small or proportionate change in quantity demanded? The relationship between demand and price provides a framework (a good background) for discussion of elasticity of demand.

 

Definition

Elasticity means ‘flexibility’, ‘responsiveness’, ‘it is responsiveness to changes’. Elasticity of demand is therefore defined as:

  1. It is the degree of responsiveness of demand to a change in price” . That is, the degree of responsiveness of quantity demanded of a commodity to a change in price of the commodity.
  2. It is a ratio of a percentage change in quantity demanded to a percentage change in price.
  3. Mathematically, it is a percentage change in quantity demanded divided by the percentage change in price.

How does demand respond to changes in price? Does a slight change in price cause demand to rise very high, a bit, or remain constant? These are the major focuses (aspects or areas) of elasticity in Economics.

And notice that “Elasticity of demand” is also referred to as “Price elasticity of demand“, and briefly as “Price elasticity“.

 

Types of elasticity of demand

There are five types of elasticity of demand; they are as follow:-

1) Elastic demand

‘Demand is elastic if a certain change in price causes more than a proportionate change in quantity demanded’. That is, a small percentage change in price causes a greater percentage change in quantity demanded.

For example, the price of a shirt is N10 and the quantity demanded per week is 100 units. When the price falls to N9.00, 150 units are bought weekly. The shirt has an elastic demand because 10% (small) change in price has led to 50% (big) change in quantity demanded. This is illustrated graphically in figure 1.

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Note: ‘E” is abbreviation of ‘elasticity’ E > l’ and ‘E < l’ means that ‘elasticity is greater than l’ and ‘elasticity is less than one’ respectively.

Buyers react more proportionately or more sensitive to a price change if demand is elastic. And they act less proportionately or less sensitive to a price change if demand is inelastic.

 

2) Inelastic demand

If a change in price leads to less than proportionate change in quantity demanded, demand is said to be inelastic. That is, “demand is inelastic if a large percentage change in price causes a small percentage change in quantity demanded”.

For example, a cup of salt is N1.00 and 100 cups are demanded daily. When the price rises to N2.00 per cup, 95 cups are demanded. The 100% (a big) change in price has only led to 5% (a small) change in quantity demanded. Such demand is therefore termed as ‘inelastic demand’. This explanation is also illustrated graphically in figure 2 above.

 

3) Unitary elasticity of demand

“Elasticity of demand is unitary if a change in price causes a proportionate (equal) change in quantity demanded”. That is, demand has a unitary elasticity if a percentage change in price leads to equal percentage change in quantity demanded.

For example, the price of a shirt is N10 and the quantity demanded is 100 units. When the price falls to N9, demand increases to 110 units. The 10% change in price has also led to 10% (equal) change in quantity demanded. This is illustrated graphically in figure below.

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Figure above shows unitary elastic demand

A percentage (10%) change in price is equal to a percentage (10%) change in quantity demanded.

 

4) Perfectly elastic demand

“Demand is completely elastic if an infinite quantity is demanded either at a fixed price or at a slightly lower prices: and demand is zero if the price is slightly increased”.

Demand is perfectly elastic if any amount is demanded at the prevailing price. That is, the price is fixed wherever the quantity demanded’. Thus the demand curve is parallel to the base line as illustrated in figure 4. Note that perfectly elastic demand is also referred to as infinitely elastic demand or completely elastic demand.

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5) Perfectly inelastic demand

“Demand is completely inelastic if the same quantity is demanded wherever the price”. For instance, food, water, cloth, house and firewood are indispensable. items to all human beings. Thus they have perfectly inelastic demand. Even though their prices quadruple or increase tenfold, people buy virtually the same quantity. That is, they buy the same quantity irrespective of increase in prices.

Perfectly inelastic demand is also referred to as ‘zero elasticity of demand‘. Hence the demand curve is perpendicular to the base as illustrated in figure 5 above.

Note: If there is increase in supply for goods with perfectly elastic demand, the quantity demanded rises, but the price remains the same. And if there is increase in supply for goods with perfectly inelastic demand, the quantity demanded remains the same but the price falls.

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