People are noticeably different from each other
their willingness to try new products
Philip Kotler,
professor of international marketing
Sooner or later the market
shows what it's worth
How many things are there that you can live without?
ancient Greek thinker
Elasticity of demand. Types of elasticity of demand
The concept of elasticity in economic theory appeared quite late, but very quickly became one of the fundamental ones. General concept elasticity came into the economy from natural sciences. The term "elasticity" was first used and applied in scientific analysis famous 17th century scientist, physicist and chemist Robert Boyle when studying the properties of gases (the famous Boyle-Mariotte law).
In economics, the French mathematician Antoine Cournot was the first to study the relationship between demand and price in various market situations and the elasticity of demand. He is considered the creator of the mathematical theory of demand. In his book “A Study of the Mathematical Principles of the Theory of Wealth” (1838), he made an attempt to apply serious mathematical apparatus to the study of economic processes. It was Cournot who first formulated the law of demand. But, unfortunately, he was not recognized during his lifetime. Cournot's ideas were picked up by the English economist Alfred Marshall and devoted his work to the mechanism of the relationship between supply and demand in the market. It was he who brought the ideas of Antoine Cournot to their logical conclusion and introduced the concept of “elasticity of demand” into economics in 1885 and defined the coefficient of price elasticity of demand.
The concept of elasticity is widely used in both microeconomics and macroeconomic analysis. It is used in the analysis of consumer behavior, determines, based on forecasts, the behavior strategy of an individual company, is used in antitrust policy, in analyzing unemployment, developing income policy, etc.
Elasticity(elasticity) - the ratio of the relative increment of a function to the relative increment of an independent variable.
The concept of elasticity of demand reveals the process of market adaptation to changes in the main factors (price of a product, price of a similar product, consumer income). Different products differ in the degree to which demand changes under the influence of one or another factor. The degree of demand responsiveness for these goods can be quantified using the elasticity of demand coefficient.
Elasticity coefficient E shows the degree of quantitative change in one factor (for example, the volume of demand or supply) when another (price, income or costs) changes by 1%.
Elastic properties:
1. Elasticity is an immeasurable quantity, the value of which does not depend on the units in which we measure volume, prices or any other parameters;
2. Elasticity of mutually inverse functions - mutually inverse quantities:
where E d is the price elasticity of demand;
E p - price elasticity according to demand;
3. Depending on the sign of the elasticity coefficient between the factors under consideration, the following may occur:
ü direct dependence, E >0, i.e. the growth of one of them causes an increase in the other and vice versa;
ü inverse relationship, E<0, т.е. рост одного из факторов предполагает убывание другого.
There are price elasticity of demand, income elasticity of demand and cross elasticity of demand.
Price Elasticity of Demand(or price elasticity of demand) – It is the percentage change in quantity demanded when price changes by one percent. In general, the coefficient of price elasticity of demand E D p is found by the formula:
, (5)
where ΔQ ⁄ Q = ΔQ% – percentage change in demand;
ΔР ⁄ P = ΔP% – percentage change in the price of the product.
For the vast majority of goods, the relationship between price and demand is inverse, that is, the coefficient is negative. It is usually customary to omit the minus, and the assessment is made modulo. However, there are cases when the elasticity of demand is positive - for example, this is typical for Giffen goods.
Graphically, elasticity corresponds to the steepness of the slope of a linear function (straight line) or a tangent to a curve with respect to the volume axis Q (Figure 27.)
Rice. 28. Graphic illustration of elasticity of demand
When calculating the elasticity coefficient, two main methods are used:
Elasticity at a point (point elasticity - point elasticity ) - used when the demand (supply) function and the initial level of price and quantity of demand (or supply) are specified. This formula characterizes the relative change in the volume of demand (or supply) with an infinitesimal change in price (or some other parameter).
Let the initial price of the product P 1, the quantity demanded - Q 1. Let the price of the product change by ∆P = P 2 - P 1, and the quantity demanded by ∆Q = Q 2 - Q 1. Let us determine the percentage changes in price and volume demanded.
∆P ‒ ∆P%. Then ∆P%= .
Likewise
∆Q ‒ ∆Q%. Then ∆Q%= .
(6)
Let us recall that the value of E d p is taken in absolute value. This formula is used for minor changes in the volume of demand and price (usually up to 5%), or in cases of calculating elasticity at a certain point or some neighborhood of a point, or in abstract problems where continuous demand functions are specified. This is precisely what its name indicates.
If it is necessary to calculate the coefficient at a certain point, then this means that there was practically no change in the argument, that is (∆P→0), then:
,
(7)
where is the derivative of the demand function with respect to price;
Market price;
Q- the quantity demanded at a given price.
To use formula (7), you need to know the analytical expression of the function in question, since during the calculation you will have to take its derivative.
In cases where the increment in values exceeds 5%, when calculating elasticity using the above formulas, the following question inevitably arises: if the values of ΔQ and ΔР can be unambiguously found both graphically and analytically, since they are defined as ΔQ = Q 2 – Q 1 ; ΔP = P 2 – P 1, then what values of P and Q should be taken as weights: basic (P 1 and Q 1) or new (P 2 and Q 2).
Let us explain with an example: let the price and volume of demand for two points A(P 1 ;Q 1) and B(P 2 ;Q 2) be known and the task be set to calculate the elasticity when moving from point A to point B. In this case, we will use for calculation formula (5), then:
Let's assume that the problem has changed a little, and we need to determine the elasticity coefficient on a segment when moving from point B to point A. We use formula (5) again.
As can be seen, the elasticity values differ. It turns out that the elasticity in the area under consideration depends on the direction in which the movement occurs. Therefore, if there are significant changes in the volume of demand and price, it is necessary to use a formula, the result of which would not depend on the direction of movement. The coefficient has this property arc elasticity, which are most often determined by the rule of midpoints.
Arc elasticity (arc elasticity - arc elasticity ) - used to measure the elasticity between two points on a demand or supply curve and assumes knowledge of initial and subsequent price and quantity levels.
In this case, the coordinates of the point midway between points A and B are taken as 100%. Using the rules of mathematics, we get:
| |
Likewise:
Then ∆Q% = .
Let us substitute the resulting expressions into formula (5)
(8)
The arc elasticity formula can be applied regardless of the percentage change in the function value and/or argument.
Knowing the elasticity coefficient, we can describe price elasticity of demand:
ü inelastic demand if 0< E d < 1, т.е. объём спроса меняется в меньшей степени, чем цена. Товарами и услугами, имеющими неэластичный спрос, являются, например, товары первой необходимости, большинство медицинских товаров и медицинских услуг, коммунальные услуги. Также чем меньше заменителей у товара, тем спрос на него менее эластичен. Например, если хлеб подорожает в два раза, потребители не станут покупать его в два раза реже, и наоборот, если хлеб подешевеет в два раза, они не будут есть его в два раза больше.
Rice. 29. Inelastic demand
In the graph, the price increased by 20 rubles. from 30 to 50 rubles, i.e. by more than 66%, and the quantity decreased by 5 pieces. – from 15 to 10 pcs., i.e. by 30%.
ü elastic, if E d > 1, i.e. quantity demanded changes more than price. This situation is typical in highly competitive markets, when the buyer can easily choose another seller with a lower price. For example, the demand in summer and autumn for vegetables and fruits or the demand for unskilled labor. This situation forces the seller to reduce the price; this is the only way he can sell more goods and increase revenue (seasonal decline in prices for agricultural goods). Also elastic is the demand for luxury goods (jewelry, delicacies), goods whose cost is significant for the family budget (furniture, household appliances), easily replaceable goods (meat, fruits).
Rice. 30. Elastic demand
In our example, when the price decreased by less than 2 times (it was 50 rubles, it became 30 rubles), the quantity of demand increased 3 times (from 10 to 30 pcs.), which means that demand is elastic.
ü unit elasticity, if E d = 1, proportional change in quantity demanded and price;
Rice. 31. Unit elasticity
In the graph, a 2-fold increase in price (from 25 to 50 rubles) led to a 2-fold reduction in the volume of demand (from 20 to 10 pcs.).
Having analyzed all three elasticity options on the graph and traced changes in the demand curve, it can be noted that according to appearance curve, one can approximately determine the type of elasticity of demand. More elastic demand is reflected by a flatter curve and, conversely, inelastic demand is characterized by a rather steep slope of the curve. But this applies more to individual sections of the curve than to the curve as a whole.
Theoretically, two more elasticity options are possible, but in reality they practically never occur.
ü completely elastic if E d ® ¥, i.e. with a constant price or its slight fluctuations, the quantity demanded increases to the limit of purchasing power. This situation is possible when in the market of a homogeneous product the price is set as a result of the interaction of many sellers and buyers. At the same time, the demand for the products of one of the sellers can be considered completely elastic: at this price he can sell any quantity of goods that he is ready to offer. Such demand is possible in agricultural markets.
Rice. 32. Perfectly elastic demand
In this case, at a price of 30 rubles. buyers are willing to buy an unlimited amount of goods. But as soon as the price goes up, they won’t buy a single one.
ü completely inelastic if E d = 0, i.e. no matter how the price changes, the quantity demanded remains unchanged. For example, the need for vital surgery does not change depending on the price of it or the demand for life-saving drugs such as insulin.
Rice. 33. Perfectly inelastic demand
In this case, we have a demand for a product that is always bought in the amount of 20 units, no matter how high its price rises.
Consider the linear demand function Q = a - bP. The graph of this function is a straight line. From the course of school mathematics it is known that the slope of such a demand curve is a coefficient in front of the independent variable P, i.e. (-b).
But we must remember that the slope and shape of the demand curve depends on the scale of the coordinate axes, and therefore it is not always possible to correctly assess the degree of elasticity of demand by the appearance of the curve. You can make the slope of the demand line more or less steep by changing the scale of the axes. 
Rice. 34. Slope of the demand curve at different scales of coordinate axes
Substituting the value (–b) into formula (6), we get 
. For a linear demand curve, the slope is constant and does not depend on price or quantity demanded. On the contrary, as the price changes, the P/Q ratio changes as it moves along the demand curve (Figure 35).
Therefore, for a linear demand curve, the price elasticity of demand is variable.
At P = 0, the elasticity of demand is zero. At Q = 0, the coefficient of elasticity of demand is equal to infinity. If Q = a/2, P = a/2b, then the price elasticity of demand is E = 1. Thus, the point of unit price elasticity of demand is in the middle of the demand line.
Fig.35. Elasticity sections of the linear demand function
The elasticity of demand for a particular product is not something given once and for all and can change under the influence of a number of factors (of course, together with the demand function itself).
Factors influencing price elasticity of demand:
ü availability of substitute goods. The more substitutes for a given good, the more elastic the demand. For example, the demand for a certain brand of soap. If the price of this brand of soap increases, then most buyers will safely switch to other varieties, although some may remain faithful to their habit. But, the demand for soap in general low elasticity (there is nothing to replace it), however, the demand for Consul soap can have very high elasticity;
ü the share of expenses for a given product in the consumer’s budget. The higher the share of expenditure on a given product, the more elastic the demand for it. If the consumer spends a small part of his budget on a given product, he does not need to change his habits and preferences when the price changes. For example, a schoolchild spends all his income on the purchase of two goods - ice cream and fountain pens. Specific gravity the cost of ice cream in his budget is 95%, and the cost of fountain pens is 5%. Let the prices of both goods increase slightly, but income does not change. In this case, the consumer may not even pay attention to the increase in the cost of fountain pens and may not change the volume of their consumption, since the share of expenses on this product is insignificant. But the schoolchild will not be able to “not notice” the rise in price of ice cream and will obviously have to reduce the quantity purchased. But the same amount would constitute a small share of the budget with a high income, and a significant one with a low income. Therefore, the elasticity of demand for the same product among consumers with high incomes is less than with low ones;
ü consumer income level. The elasticity of demand for the same product varies among consumers with different income levels. The higher the consumer's income, the lower the price elasticity of demand. The richer a person is, the less sensitive he is to changes in prices for most goods. A billionaire, of course, may be concerned about the rise in price of ocean-going yachts or paintings at international auctions, but he is unlikely to notice the rise in price of bread or apples;
ü time factor. The longer the time interval under consideration, the higher the price elasticity of demand. Immediately after the price of the necessary product rises, you may not find a replacement for it and will continue to buy almost the same volume, but over time the situation may change. For example, an increase in the cost of cigarettes can lead to a gradual cessation of smoking, and an increase in the price of oil can lead to a switch to smoking. alternative sources energy;
ü the importance of the product for the consumer. All other things being equal, the less important a product or service is for the consumer, the higher its elasticity. The elasticity of demand is lowest for those goods that, from the consumer's point of view, are necessary. We're not just talking about bread here. For one, the necessary goods are tobacco and alcohol, for another - stamps and match labels, for a third - Levi Strauss jeans. It's a matter of taste. A variation of this pattern is the particularly low elasticity of demand for those goods whose consumption (from the consumer’s point of view) cannot be postponed. “I really need it” plus “I urgently need it” - and the buyer becomes accommodating. Example: demand for flowers on March 8, September 1, etc.;
ü degree of saturation of needs. The higher it is, the less elastic the demand. The law of diminishing marginal utility applies here: the greater the supply of a good, the lower its marginal utility, the more good the consumer has, the lower the price the consumer is willing to pay for the next unit of good;
ü availability of the good. The higher the degree of commodity shortage, the lower the elasticity of demand for this product;
ü variety of possibilities for using this product. The more various areas the product has a use, the more elastic the demand for it. This is due to the fact that an increase in price reduces the area of economically justified use of a given product. On the contrary, reducing the price expands the scope of its economically justified application. This explains the fact that the demand for universal equipment is, as a rule, more elastic than the demand for specialized devices.
Factors of demand inelasticity:
The sensitivity of different consumer groups to the price of the same product may differ significantly.
The consumer will be price insensitive under the following conditions:
ü the consumer attaches great importance to the characteristics of the product. Demand is price inelastic if “failure” or “frustration” results in significant loss or inconvenience. In order to avoid getting into such a situation, a person is forced to overpay for the quality of the product and purchase those models that have proven themselves well;
ü the consumer wants a custom-made product and is willing to pay for it. If a buyer wants to purchase a product made to suit his individual needs, he often becomes tied to the manufacturer and is willing to pay a higher price as a fee for the hassle. Later, the manufacturer can increase the price of its services without much risk of losing the buyer;
ü the consumer has significant savings from using a specific product or service. If a product or service saves time or money, then the demand for such a product is inelastic;
ü the price of the product is low compared to the consumer’s budget. When the price of a product is low, the buyer does not bother going shopping and carefully comparing products;
ü the consumer is poorly informed and makes poor purchases.
Table 9. Buyers' reaction to price changes
| E d | Nature of demand | Buyer Behavior | |
| when the price drops | when the price increases | ||
| E d = ∞ | Perfectly elastic | Increase the volume of purchases by an unlimited amount | Reduce the volume of purchases by an unlimited amount (completely refuse the product) |
| 1 < E d < ∞ | Elastic | Significantly increase the volume of purchases (demand grows at a faster rate than the price decreases) | Significantly reduce the volume of purchases (demand decreases at a faster rate than the price increases) |
| E d =1 | Unit elasticity | Demand rises at the same rate as price falls | Demand decreases at the same rate as price increases |
| 0< E d <1 | Inelastic | The rate of demand growth is less than the rate of price decline | The rate of demand decline is less than the rate of price increase |
| E d = 0 | Completely inelastic | The volume of purchases does not change at all |
The elasticity indicator is important not so much for the consumer as for the manufacturer or seller, because The income of the seller (producer) depends on the nature of elasticity. In fact, income is what the seller receives when selling a certain amount of goods, i.e. TR = P * Q, where TR is the total revenue of the seller, P is the price of the product, Q is the quantity of goods sold. The change in total revenue depends on changes in price and/or quantity.
Let's find out how total revenue depends on the elasticity of demand at linear demand function: Q=a-bP. Revenue is a direct function of sales volume: TR= = F(Q). To determine it, you need to express the price of the product through Q: P = (inverse demand function) and substitute this expression into TR: TR=P∙Q=()∙Q. The graphical representation of a function is a parabola, the branches of which are lowered down. The top of the parabola (maximum revenue) is achieved at Q = a/2; P = a/2b, that is, with unit elasticity of demand.
When the price of a product decreases (blue arrow on the graph - Figure 36), the total revenue of sellers increases from zero to a maximum in the elastic part of the demand curve, and then it decreases from the maximum value to zero in the inelastic part of the demand curve.
When the price of a product decreases (red arrow on the graph - Figure 36), the total revenue of sellers increases from zero to a maximum in the inelastic part of the demand curve, and then it decreases from the maximum value to zero in the elastic part of the demand curve.
 |
|||
Rice. 36. Dependence of revenue on the nature of elasticity of demand
If demand for a product is price elastic, then price and total revenue move in opposite directions: P↓-TR; P-TR↓.
If demand for a product is price inelastic, then price and total revenue change in the same direction:
P↓- TR↓; P-TR.
Let's represent the above in the form of a table:
Table 10. Change in price and total revenue from product sales
Example 1. When the price of a Samsung Duos mobile phone increases from 100 to 110 dollars. the volume of purchases per day decreased from 2050 to 2000 items. Calculate the coefficient of point price elasticity of demand and determine whether demand is elastic.
Solution: Using the point elasticity formula, we calculate the coefficient of price elasticity of demand based on the initial data of the problem:
E d r = │((2000-2050) : 2050) : ((110 – 100):100) │= 0.024: 0.1 = 0.24
ANSWER: Since |E p |=0.24, the demand for the Samsung Duos mobile phone is inelastic.
Example 2. The price of apples in winter increased from 5 rubles/kg to 12 rubles/kg, while the volume of demand decreased from 10 tons to 8 tons per month. Using the arc price elasticity of demand formula, determine whether the demand for apples is elastic? How will the revenue of apple sellers change?
Solution: we use the demand elasticity formula (7):
E d p = -(8000–10000)/(10000 + 8000) * (12+5)/(12–5) = 2/18 * 17/7 = 34/126 = 0.27.
Demand is inelastic because 0.27<1.
Sellers' revenue is determined as the product of price and sales volume, hence: TR(revenue) = P * Q.
TR 1 = P 1 *Q 1 = 5 * 10000 = 50000 (r.);
TR 2 = P 2 * Q 2 =12 * 8000 = 96,000 rub.
ANSWER: the demand for apples is inelastic because... E d p = 0.27. Revenue from the sale of apples increased by 46 thousand rubles.
Example 3. Let the demand function have the form . Estimate the price elasticity of demand at price .
Solution: to calculate the elasticity coefficient we need to know and .
At a price
First derivative of the demand function Q′(P) = (4 – 2P)′ = -2.
Substitute the obtained values into the point elasticity formula and get
ANSWER: the economic meaning of the obtained value is that a change in price by 1% relative to the initial price P = 1 will lead to a change in the quantity demanded in the opposite direction by 1%. Demand is characterized by unit elasticity.
In addition to price elasticity of demand, income elasticity of demand is considered.
Income elasticity of demand E I D(income elasticity of demand) – It is the percentage change in quantity demanded for a one percent change in income.
Found by the formula:
E I D = % ΔQ d: % ΔI, (9)
where % ΔQ d is the percentage change in the quantity of demand;
% ΔI – percentage change in income.
In its expanded form, the arc elasticity formula is usually used:
(10)
Where Q 0 and Q 1- the amount of demand before and after a change in income;
I 0 and I 1- income before and after the change.
The peculiarity of income elasticity of demand is that it changes its sign for some goods.
As our income increases, we buy more clothes and shoes, high-quality food products, and household appliances. If an increase in income leads to an increase in demand for a product, then this product falls into the “normal” category. But there are goods for which demand is inversely proportional to consumer income: all “second hand” products, some types of food (for example, some cereals). If, with a decrease in consumer income, the demand for a product increases, then this product belongs to the “inferior” category. For the most part, consumer goods fall into the normal category.
Using the income elasticity of demand, we can classify goods:
Factors of income elasticity of demand:
1. on the importance of a particular benefit for the family budget. The more a family needs a good, the less elastic it is;
2. whether this good is a luxury item or a necessity. For the former good the elasticity is higher than for the latter;
3. from the conservatism of demand. When income increases, the consumer does not immediately switch to consuming more expensive goods.
It should be noted that for consumers with different income levels, the same goods can be classified as either luxury goods or basic necessities. A similar assessment of benefits can also take place for the same individual when his level of income changes.
Figure 37 shows graphs of demand versus income for various values of income elasticity of demand. These graphs are called Engel curves(Engel curve):
Fig.37. Dependence of demand on income: a) high-quality inelastic goods; b) high-quality elastic goods; c) low-quality goods
Demand for quality inelastic goods increases with income only when household incomes are low. Then, starting from a certain level I 1, the demand for these goods begins to decline.
The demand for high-quality elastic goods (for example, luxury goods) is absent up to a certain level I 2, since households do not have the opportunity to purchase them, and then increases with increasing income.
The demand for low-quality goods first increases to a certain value I 3 , then decreases as income increases.
Example 4. The demand for a product at an income of 20 is 5, and at an income of 30 it is equal to 8. The price of the product remains unchanged. What category does the product belong to?
Solution: using the income elasticity of demand formula:
E I D = (8-5)/(8+5)·(30+20)/(30-20) = (3/13) . (50/10)=(3/13) . 5= 15/13˃1
ANSWER: luxury item.
To determine the degree of influence of a change in the price of one product on a change in demand for another product, the concept of cross elasticity is used. Thus, a rise in the price of butter will cause an increase in demand for margarine, a decrease in the price of Borodino bread will lead to a reduction in demand for other types of black bread.
Cross price elasticity of demand E D AB(cross price elasticity of demand) – The percentage change in the quantity demanded of good A when the price of good B changes by one percent.
(11)
where Q A is the quantity of demand for product A;
P B – price of product B.
The cross elasticity coefficient can be either positive or negative.
If E D AB > 0, then when the price of product B increases, the quantity of demand for product A increases. This is typical for substitute goods (substitutes).
If E D AB< 0, then an increase in the price of product B leads to a decrease in the quantity of demand for product A. This is typical for complementary goods.
If E D AB = 0 or close to zero, this means that the goods in question are independent of each other and a change in the price of one of them will not in any way affect the change in the quantity of demand for the other.
Table 11. Classification of goods
The main factor determining the cross elasticity of various goods is the consumer properties of various goods, their ability to replace or complement each other in consumption. Cross elasticity can be asymmetrical, where one product is strictly dependent on another. For example: the computer market and the mouse pad market. A reduction in the price of computers causes an increase in demand in the market for mats, but if the price of mats decreases, it will not have any effect on the quantity of demand for PCs.
Example 5. When the price of product A increases from 20 to 22 UAH. the demand for product B decreased from 2000 to 1600 units, the demand for product C increased from 800 to 1200 units, the demand for product D remained at the same level. Determine the cross-elasticity coefficients and the nature of the goods.
Solution: calculate the cross price elasticity coefficients for goods B, C and D:
E d AB = ((1600 – 2000) : (2000 + 1600) : ((22 – 20) : (20 + 22)) = - 1/9: 1/21 = - 21/9
E d AC = ((1200 – 800) : (800 + 1200)) : ((22 – 20) : (20 + 22)) = 1/5: 1/21 = 21/5 =
Since the demand for good D has not changed, E d AD = 0.
ANSWER: because E d AB< 0, то товары А и В – взаимодополняемые, т.к. Е d АС >0, then A and C are substitutes, and product D and product A are independent (neutral).
Elasticity of supply
As noted, the main factor influencing the quantity of supply is the price of the product. The relationship between changes in the quantity supplied and the price of a product is expressed in the price elasticity of supply.
Price elasticity of supply(elasticity of supply) – It is the percentage change in quantity supplied when price changes by one percent.
The price elasticity coefficient of supply E S p is calculated using the formula:
,
(12)
where ΔQ(P)% is the percentage change in supply;
Δ P% - percentage change in price.
From the law of supply, we know that there is a direct relationship between the price of a given product and the volume of supply, that is, as the price increases, the quantity of the product that producers are willing to offer to the market increases, and vice versa. Therefore, the price elasticity of supply is usually non-negative: .
Point and arc elasticity of supply by price are calculated using the same formulas as point and arc elasticity of demand by price, only instead of the quantity of demand, the quantity of supply should be put in them.
(13)
–
point elasticity,
where Q′(P) is the derivative of the supply function by price;
P S – price at point;
Q S – corresponding quantity.
(14) - arc elasticity,
where Q 2, Q 1 are the next and previous values of the supply quantity, respectively;
Р 2, Р 1 – next and previous price values, respectively.
The slope of supply curves gives a certain idea of the degree of elasticity of supply with respect to the price of a product. The flatter the supply curve of a product, the greater elasticity it has. The steeper the supply curve, the less elastic the supply of a particular good.
If, when the price of a good changes, the quantity supplied changes more than the price, then supply is said to be elastic. Conversely, if the supply of a good changes less when the price changes, then the supply of the good is inelastic. When talking about price elasticity of supply, we mean the seller's response to price changes.
Let us consider the form of supply curves depending on elasticity using the example of a linear function.
Let the supply function be given in the general form , a>0.
The slope of the linear supply function is equal to b – the coefficient of the independent variable P, i.e. Q′(P) = b = const. Ratio is a variable quantity.
Let’s imagine a situation that is well known in Russian conditions: the manufacturer of a product (service) raises the price. How sharply will the volume of demand change and will it change at all? How will demand react to lower prices? In particular, it is important for the head of a company to be able to predict the market reaction to changes in certain conditions for the sale of their goods, especially to changes in such a parameter as price. Will profits increase when the price of a product rises or, on the contrary, will all potential buyers switch to competitors selling their product at the same price? Then maybe we need to lower the price? But won't a decrease in the price of a product lead to a drop in profits?
Practice constantly requires managers to answer such questions, and quantitative answers that accurately predict results. decisions made. To give these answers, it is necessary to become familiar with the elasticity apparatus, the use of which makes it possible to predict market changes as a result of the pricing policy of both individual producers and the state as a whole.
Elasticity shows the degree to which one quantity responds to a change in another, for example, a change in quantity demanded due to a change in price. Such a reaction can be strong or weak and, naturally, the demand and supply curves we have studied will change their shape. Let's start getting acquainted with the elasticity apparatus with the elasticity of demand. In Fig. Figure 1.35 shows two main types of demand curves.
In the first case (see Fig. 1.35, D"D") The slightest increase in price causes a sharp drop in quantity demanded. Demand that responds flexibly and sensitively to price changes is called elastic, and the corresponding goods are goods with elastic demand. In the second case (see Fig. 1.35, D"D") even a significant increase in price causes only a small decrease in the quantity demanded of the product, which corresponds to inelastic demand. To the product
Rice. 1.35.
D.V.– elastic demand; D"D"– inelastic demand
frames with inelastic demand include, for example, essential goods for which there is no replacement, as well as goods with rush demand (for example, flowers on the eve of March 8).
Taking into account the elasticity of demand for a product (service) is of great practical importance for the manufacturer. Thus, an increase in the price of a product with elastic demand will have a painful impact on the financial condition of the manufacturer, since the volume of demand (and with it sales revenue) will drop sharply. In the second case, on the contrary, financial situation enterprises, with an increase in the price of products characterized by inelastic demand, improves, because the volume of demand for it practically does not change, and therefore, sales revenue will increase.
In economic analysis economic activity When considering the elasticity of demand, sometimes it is enough to state the fact of elasticity or inelasticity of demand, without striving for greater specificity. In other cases, it is useful to give this process quantitative characteristics; in this case, the elasticity of demand is defined as the ratio of the relative change in the quantity of a good to the relative change in its price:
Why are relative indicators of changes in the analyzed parameters used when determining elasticity? Because the use of absolute values makes it impossible to compare elasticities for different products. Even with monetary measurement of production volumes Q elasticity indicators will be practically incomparable. Suppose, for example, that the prices of one kilogram of bread and one refrigerator decreased by the same amount - 1 ruble. As a result, the volume of demand for bread will increase significantly. Buyers of refrigerators will most likely not react to such a price reduction. Absolute value ratio Δ Q/ΔP in this case, for bread it will be much more than for the refrigerator. However, it does not at all follow from this that the demand for bread is much more sensitive to price changes than the demand for refrigerators.
In the above formula, when calculating the initial values characterizing the change in the quantity and price of a product, the so-called midpoint, proposed by the famous mathematician and economist R. Allen, is used as the denominator. This approach, in contrast to the generally accepted approach when calculating relative quantities (where the initial, base value of the changing quantity is taken as the denominator), allows us to eliminate the influence of the nature of their change (decrease or increase). The comparison of these approaches is demonstrated below using a conditional example.
What sign will the elasticity coefficient calculated using the formula under consideration have? With the usual (normal) reaction of demand to a change in price, changes in quantity and price occur in opposite directions, therefore the value of the elasticity coefficient is obtained for “normal” goods with a “minus” sign. However, in the common practice of economic analysis, it is customary to omit the minus sign, since it creates certain difficulties when comparing price elasticity coefficients.
Indeed, let it be necessary to compare two price elasticity coefficients: . Obviously, mathematically, the number -2 is greater than the number -6. But an economic comparison of these coefficients gives the exact opposite result. Economically, number 6 expresses greater consumer sensitivity to price changes than number 2. As a result, there is inconsistency in the interpretation of elasticity coefficients from an economic and mathematical point of view. That's why negative sign before the price elasticity coefficient is omitted for comparative analysis purposes. Elasticity can vary from zero to infinity (Fig. 1.36).
Rice. 1.36.
I – elastic; 11 – inelastic
This relationship is easy to explain purely arithmetically. In the upper left corner, the relative change in the quantity of production is large, since here we are talking about quantities of a small order. Conversely, the relative price change is a rather modest value, since the base against which the comparison is made is very high. At the bottom of the demand curve the situation is reversed.
Let's consider the main typical options for the values of the price elasticity coefficient and give their economic interpretation.
In Fig. Figure 1.37 shows a unitary demand curve for which the price elasticity of demand is equal to one at all possible prices. For a curve with unit elasticity, i.e. the consumer spends the same amount of money on a given product regardless of its price. In market countries, a commodity such as housing has approximately the same characteristics: consumers react to any changes in housing prices with approximately the same magnitude, with opposite sign changes in the amount of rented (purchased) space.
- 10 20 30 40 Q i
Rice. 1.37. Unitary (unit) demand curve
For an analytically specified demand function, the price elasticity of demand can be calculated using the derivative according to the formula
Taking into account the definition of the derivative, we obtain
Example. The demand function is given. Determine the coefficient of price elasticity of demand at P= 10 days units
Solution. Volume demanded at a price of 10 den. units will be 50 pcs. Then
Or, omitting the minus sign, we get
For linear dependence The formula for calculating the coefficient of price elasticity of demand can be written in general form as follows:
It is easy to verify that the price corresponding to the point of unit elasticity () in this case is determined by the formula
Now let’s look at what determines the price elasticity of demand.
- 1. The more substitutes (substances) a product has and the closer they are beneficial properties, the higher the elasticity of demand for this product, since an increase in its price forces the consumer to buy less of this product and more substitute goods. When there are no substitute goods (such as salt or gasoline), demand will be inelastic.
- 2. The larger the place a product occupies in the consumer’s budget, other things being equal, the higher the elasticity of demand for it. An increase in the prices of such goods leads to a significant reduction in the number of purchases, and vice versa. The volume of demand for matches, for example, will remain virtually unchanged, even if their price increases several times, which will indicate low price elasticity of demand.
- 3. The more pressing the need satisfied by a product, the lower the elasticity of demand for this product. So, for example, the demand for bread will be less elastic than the demand for, say, emeralds.
- 4. The longer the period of time for making a decision to purchase a product, the more elastic the demand for the purchased product. If the price of a product increases, the consumer needs some time to find and try other products.
Having time to make a decision to purchase a product, consumers can adjust their wishes and find a substitute for any good. A classic example of a change in the elasticity of demand over time is the demand for gasoline, which in the shortest (instantaneous) period will be almost completely inelastic, which will be reflected in the purchase of gasoline at any price by those who are on the road. In the short term, elasticity increases, which will be the result of more frequent use of, for example, a bicycle or an electric train. In the long term, alternative fuel sources for cars (alcohol, gas, etc.) may appear.
The concept of elasticity of demand is of great practical importance. Here are some examples of its use for market analysis.
1. Justification for the decision to change the price of a manufactured product. Let's look at the data in Table. 1.4.
Table 1.4
Calculation of the elasticity coefficient
|
Unit price R, den. units |
Product quantity Q, pcs. |
Change in demand |
Change in price |
Elasticity coefficient |
Sales proceeds, P-Q, den. units |
* Economic sense The specific numerical value of the elasticity coefficient is as follows: an elasticity equal to, for example, 2.0 means that the quantity of demand will change by 2% when the price changes by 1%.
Based on them, the following conclusions can be drawn:
- – when the demand elasticity coefficient is greater than one (demand is elastic) a decrease in price causes the quantity demanded to increase so much that total revenue increases;
- – if the coefficient of elasticity of demand is equal to one, then the decrease in price is exactly compensated by the increase in sales, so that total revenue remains unchanged;
- – when the demand elasticity coefficient is less than one ( demand is inelastic) a decrease in price causes such a small increase in quantity demanded that total revenue falls.
Thus, with a demand elasticity coefficient less than one, the manufacturer can increase prices for its products and increase revenue. But if the elasticity coefficient is greater than one, it is better not to increase prices, because sales revenue will begin to decline. To increase revenue in this case, prices must be lowered. Consequently, the company will have maximum revenue in the case when the elasticity of demand coefficient is equal to one (Fig. 1.38).
2. Elasticity and taxation. When choosing which goods and services to tax, for example, an excise tax, the government must have answers to the following questions: from whom to collect the tax - from producers or consumers; what will be the amount of additional revenues to the state budget; who will bear the main tax burden; What will be the net loss to society from the introduction of the tax?
Suppose that a tax of 1 thousand rubles is established on some product, and the sales volume is 10 thousand units.
Rice. 1.38.
State revenues from taxation are equal to 10 million rubles.
Now, if the tax is increased, say, to 1.5 thousand rubles. and a correspondingly higher price will lead to a reduction in sales to 5 thousand units. due to the elasticity of demand, tax revenues will fall to 7.5 million rubles. Thus, an increase in tax on a product for which demand is elastic will result in a reduction in tax revenue. This forces legislators, when setting excise taxes, to look for goods for which demand is inelastic, for example alcoholic drinks and cigarettes.
To answer the remaining questions, let us analyze the graphical model of tax collection presented in Fig. 1.39.
Rice. 1.39. Elasticity and tax distribution under elastic(A) and inelastic(b) in demand
Let us assume that the tax is levied on producers. For simplicity, we will assume that the tax per unit of production N is constant and does not depend on the volume of production. In this case, the introduction of a tax leads to a parallel shift of the supply curve upward by the amount tax rate N into position. When a tax is introduced, the market price of a product increases, and the volume of sales decreases. The total amount of tax revenues to the budget is determined as the product of the tax rate and sales volume:
In this case, part of the tax time falls on consumers, and the other part on producers.
It is easy to verify that
Analysis of Fig. 1.39, a and b shows that a greater tax burden falls on an economic agent with less elasticity, who has less ability to switch to substitute goods, for example. In particular, if the price elasticity of demand is zero (), then the entire tax burden will “fall on the shoulders” of consumers, since regardless of the amount of the tax (and, consequently, the value of the price), consumers will not change the volume of purchases. If the demand for any product is characterized by absolute elasticity (), then producers are the losers, since consumers evade the tax, reducing the volume of demand, and switch to consuming substitute goods. In this case, the entire tax burden falls on the shoulders of producers.
Using the concepts of consumer surplus, as well as producer surplus, it is quite simple to calculate the net loss to society from the introduction of a tax. In Fig. 1.39, a and b it will be the value corresponding to the triangle. It is quite obvious that the higher the elasticity of supply and demand, the greater the net losses to society associated with the taxation of the corresponding goods.
3. Elasticity of demand and the consequences of production automation. Let's take the following example.
The firm installed new labor-saving equipment, and this resulted in technological unemployment of, say, 500 workers. Suppose that some of the cost savings resulting from technological progress are passed on to consumers through lower prices. A reduction in prices will cause an increase in sales volume, which, as we know, depends on the elasticity of demand for a given product. This, in turn, will lead to an increase in production volumes and some or even all of the laid-off workers will be able to return to their company.
4. Price elasticity and agricultural production. In most countries with market economy demand for agricultural products is inelastic. Therefore, the expansion of agricultural production volumes leads to a sharp drop in prices and a decrease in the total income of farmers. It follows that expansion of the production of many agricultural products in market conditions is possible mainly only with subsidies to this industry from the state. In most developed countries agriculture subsidized from the state budget (i.e. at the expense of taxpayers), and for some agricultural goods a lower price threshold is legally established, which allows farmers to increase production without the threat of a decrease in total income (revenue).
- Allen Roy George Douglas(1906–1983) – English economist, mathematician, statistician. Known for his work on utility theory and index theory.
- The unitary demand curve with unit elasticity is a graphical illustration of the so-called isosceles hyperbola.
Let's move on to consider the broader picture of the impact on demand of changes in price and income.
Price elasticity of demand
The measure of the response of one quantity to a change in another is called elasticity.
Elasticity shows by what percentage one economic variable changes when another economic variable changes by one percent. An example would be price elasticity of demand (price elasticity of demand), which shows how much the quantity demanded of a product will change in percentage terms if its price changes by one percent.
If you set the price R, and the quantity of demand Q, then the indicator (coefficient) of price elasticity of demand
Where Q – change in demand, %; R – price change; Er – elasticity is considered based on price.
Similarly, you can determine the elasticity indicator for income or some other economic value.
The indicator of price elasticity of demand for all goods is a negative value. Indeed, if the price
the goods decrease, the quantity demanded increases, and vice versa. However, to assess elasticity, the absolute value of the indicator is often used (the minus sign is omitted).
For example, a 5% reduction in the price of washing powder caused an increase in demand for it by 10%. Elasticity coefficient
If the absolute value of the price elasticity of demand indicator is greater than one, then we are dealing with relatively elastic demand. In other words, a change in price in this case will lead to a greater quantitative change in the quantity demanded.
If the absolute value of the price elasticity of demand is less than 1, then demand is relatively inelastic. In this case, a change in price will entail a smaller change in quantity demanded.
When the elasticity coefficient is equal to one, we speak of unit elasticity. In this case, a change in price leads to the same quantitative change in the quantity demanded.
In Fig. Figure 10.11 shows two demand options. In Fig. 10.11, A price reduction from P0 to P1 from 5 to 4 thousand rubles. (by 20%) will lead to an increase in the quantity of demand with Q 0 to Q 1 those. from 100 to 140 thousand pieces. (by 40%). The elasticity coefficient will be 2 (40: 20), i.e. it is greater than one, and demand is relatively elastic.
What will happen to the proceeds from product sales? It will increase from 500 (5,100) to 560 million rubles. (5 140), i.e. will grow by 12%. The shaded rectangles “0” and “1” clearly show an increase in revenue from product sales when prices decrease under conditions of elastic demand. The area of rectangle "1" is greater than the area of rectangle "0".
In Fig. 10.11, b An example of inelastic demand is given. Reducing the price by 1 thousand rubles. (With P0 to P1 ) will increase the quantity of demand by only 10 thousand units. The elasticity coefficient here is 0.5 (10: 20%). At the same time, sales revenue will fall from 500 to 440 million rubles. Naturally, in such a situation, the company will not reduce the price of its products, not without reason fearing a decrease in its income.
Rice. 10.11. Relatively elastic(a) and relatively inelastic (b) demand
There are two extreme cases. In certain limited areas of demand, it can be completely elastic or completely inelastic. The first case is the existence of only one price at which the product will be purchased by buyers. Any change in price will lead either to a complete refusal to purchase this product (if the price rises) or to an unlimited increase in demand (if the price decreases). At the same time, demand is absolutely elastic, the elasticity indicator is infinite. Graphically, this case can be depicted as a straight line parallel to the horizontal axis (Fig. 10.12, A ). Demand for the products of individual firms in perfectly competitive markets can be completely elastic (see 12.3). For example, the demand for grain offered by an individual supplier on a commodity exchange is perfectly elastic. However, in general, market demand for grain is not completely elastic.
Rice. 10.12.
A – demand is absolutely elastic; b – demand is completely inelastic
Another extreme case is that a change in price does not affect the quantity demanded. Graph of absolutely inelastic demand (Fig. 10.12, b ) looks like a straight line perpendicular to the horizontal axis. An example would be the demand for individual species medications that the patient cannot do without, etc. However, demand can only be absolutely inelastic in a certain area. If the price rises significantly, buyers will still refuse to purchase even the most vital goods and the degree of elasticity will change.
Thus, the absolute value of the price elasticity of demand indicator can theoretically vary from zero to infinity:
- 1 EP|
- 0 Er|
|Er| = 1 – demand with unit elasticity
Elasticity - a measure of the response of one quantity to a change in another is called elasticity. Elasticity shows by what percentage one economic variable changes when another changes by 1%.
Demand depends on the quality of the product, its price, customer income, prices for similar products, consumer tastes and preferences. With an increase in product prices, the manufacturer can expect, all other things being equal, a decrease in demand for it.
Price elasticity of demand, or price elasticity of demand, shows by what percentage the quantity demanded for a product changes when its price changes by 1%.
If we denote the price P and the quantity of demand Q, then the indicator (coefficient) of price elasticity of demand E P is equal to:
Where is the change in the quantity of demand (%);
Price change (%);
p(price) in the index means that the elasticity is considered by price.
The price elasticity of demand for all goods is usually negative. Indeed, if the price of a product decreases, then the quantity demanded increases, and vice versa. However, to assess elasticity, the absolute value of the indicator is often used.
If the absolute value of the price elasticity of demand indicator is greater than one, then we are dealing with elastic demand. A change in price in this case will lead to a larger quantitative change in the quantity demanded. This means that rising prices lead to a decrease in the manufacturer's revenue.
If the absolute value of the price elasticity of demand is less than one, then demand will be inelastic. In this case, a change in price will entail a smaller change in the quantity demanded, and the producer's revenue will decrease as prices rise.
When the elasticity coefficient is equal to one, we speak of neutrally elastic demand. In this case, a change in price leads to the same quantitative change in the quantity demanded, but the producer’s revenue does not change.
Differences in the elasticity of demand are explained by the importance of a particular product for the consumer. The demand for necessities is usually inelastic, while the demand for goods that do not play an important role in the consumer's life is usually elastic.
Types of elasticity.
1.Price elasticity of demand.
Price elasticity of demand shows by what percentage the quantity demanded will change if the price changes by 1%. The price elasticity of demand is influenced by the following factors:
The presence of competing goods or substitute goods (the more there are, the greater the opportunity to find a replacement for the more expensive product, that is, the higher the elasticity);
A change in the price level that is invisible to the buyer;
Conservatism of buyers in tastes;
Time factor (the more time the consumer has to choose a product and think about it, the higher the elasticity);
The share of the product in consumer expenses (the greater the share of the price of the product in consumer expenses, the higher the elasticity).
The elasticity of demand is affected by shelf life and production features. Perfect elasticity of demand is characteristic of goods in a perfect market, where no one can influence its price, therefore, it remains unchanged. For the vast majority of goods, the relationship between price and demand is inverse, that is, the coefficient is negative. It is usually customary to omit the minus and evaluate it modulo. However, there are cases when the elasticity of demand is positive - for example, this is typical for Giffen goods.
Products with elastic demand by price:
Luxury items (jewelry, delicacies)
Products whose cost is significant for the family budget (furniture, household appliances)
Easily replaceable goods (meat, fruits)
Products with inelastic demand by price:
Essential items (medicines, shoes, electricity)
Products whose cost is insignificant for the family budget (pencils, toothbrushes)
Hard-to-replace goods (bread, light bulbs, gasoline)
2. Point price elasticity of demand.
The point price elasticity of demand is calculated using the following formula:
Where the superscript D means that this is the elasticity of demand, and the subscript p means that this is the price elasticity of demand. That is, the price elasticity of demand shows the degree to which demand changes in response to a change in the price of a product. The value usually turns out to be negative, since, as follows from the law of demand, as the price increases, the demand for a product decreases.
Depending on these indicators there are:
|
Perfectly inelastic demand |
the quantity demanded does not change when the price changes (essential goods). |
|
|
Inelastic demand |
when the quantity demanded changes by a smaller percentage than the price (everyday goods, the product has no substitute). |
|
|
Unit elasticity of demand |
a change in price causes an absolutely proportional change in the quantity demanded. |
|
|
Elastic demand |
the volume of demand changes by a larger percentage than the price (goods that do not play an important role for the consumer, goods that have a substitute). |
|
|
Perfectly elastic demand |
The quantity demanded is unlimited when the price falls below a certain level. |
3. Arc elasticity of demand with respect to price.
In cases where changes in price and/or demand are significant (more than 5%), it is customary to calculate the arc elasticity of demand:
Where and is the average value of the corresponding quantities.
That is, when the price changes from p 1 to p 2 and the volume of demand from Q 1 to Q 2, the average price value will be =, and the average demand value =
4. Income elasticity of demand.
Income elasticity of demand shows by what percentage the quantity demanded will change if income changes by 1%. It depends on the following factors:
The importance of the product for the family budget.
Whether the product is a luxury item or a necessity item.
Conservatism in tastes.
By measuring the income elasticity of demand, you can determine whether a given product is classified as normal or low-value. The bulk of consumed goods belong to the normal category. As our incomes increase, we buy more clothes, shoes, high-quality food products, and durable goods. There are goods for which demand is inversely proportional to consumer income. These include: all second-hand products and some types of food (cheap sausage, seasoning). Mathematically, the income elasticity of demand can be expressed as follows:
where the superscript D means that this is the elasticity of demand, and the subscript I says that this is the income elasticity of demand. That is, income elasticity of demand shows the degree to which demand changes in response to changes in consumer income. Depending on the properties of goods, the income elasticity of demand for these goods can be different. The classification of goods according to E values is given in the following table:
|
Normal (full) good |
The quantity demanded increases as the consumer's income increases. |
|
|
Luxury item |
Quantity demand changes by a greater percentage than income. |
|
|
Essential goods |
Quantity demand changes by a smaller percentage than income. That is, when income increases by a certain number of times, the demand for a given product will increase by a smaller number of times. |
|
|
Inferior (inferior) good |
The quantity demanded falls as consumer income increases. An example is the pearl barley consumption market. |
|
|
Neutral good |
There is no direct relationship between the consumption of this good and changes in income. |
5. Cross elasticity of demand
It is the ratio of the percentage change in demand for one good to the percentage change in the price of some other good. A positive value means that these goods are interchangeable (substitutes), a negative value shows that they are complementary (complements).
where the upper index D means that this is the elasticity of demand, and the lower index AB indicates that this is the cross elasticity of demand, where A and B mean any two goods. That is, cross elasticity of demand shows the degree to which the demand for one good (A) changes in response to a change in the price of another good (B).
Depending on the values taken by the variable E, the following connections between goods A and B are distinguished:
|
Substitute goods |
Consumers can theoretically substitute consumption of good A for consumption of good B. For example, two brands of laundry detergent. |
|
|
Complementary goods |
Consumers theoretically cannot change the consumption of product A without changing in the same direction the consumption of product B. A good example is laptops and their components. |
|
|
Products independent from each other |
A change in the price of good B has no effect on the consumption of good A. |
PRICE ELASTICITY OF DEMAND - an assessment of the change in the quantity of demand for a product when the price changes. More precisely, price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.
Price elasticity of demand is a quantity used to measure the sensitivity of quantity demanded to a change in the price of a product, holding other factors affecting demand constant.
The price elasticity of demand for different products can vary significantly. The demand for basic necessities (food, shoes) is inelastic, since they are necessary for life and, despite the increase in price, it is impossible to refuse their consumption. Luxury goods, on the contrary, have a higher price elasticity.
The price elasticity of demand depends on the following factors:
ELASTICITY MEASUREMENT. To measure elasticity, you need to determine how much demand changes when price changes.
The numerical value of the price elasticity of demand coefficient can be determined using the following formula:
where Q, D is the volume of demand measured along the demand curve; P – price of the product.
We will proceed from the assumption that a 1% increase in the price of a new computer (all other things being equal) will lead to a 2% decrease in the number of annual computer sales (compared to previous year) In this case, the price elasticity of demand will be: 2% / 1% = -2.
The price elasticity of demand is expressed as a negative number, since the law of demand assumes that for any change in price, the change in quantity demanded will be the opposite. This means that if the denominator is positive, the numerator is negative, and vice versa. The ratio of two percentage changes is always negative, since the numerator and denominator have different signs.
The price elasticity of demand can decrease from zero to minus infinity. The greater the absolute value of the price elasticity of demand, the greater the price elasticity of demand. Thus, demand is more elastic with the value E D = -5 than with E D = -1, since the number 5 is the absolute value for -5 and greater than 1, i.e. greater than the absolute value of -1.
There are several forms of price elasticity of demand:
We illustrate these forms of elasticity in Fig. 14.1, 14.2.
In Fig. Figure 14.1 shows three demand curves with different elasticities. In all cases, prices are halved, and the amount of consumer demand changes in different ways. In Fig. 14.1a, a halving of price causes a triple increase in demand. In Fig. 14.16 A double decrease in price leads to a double increase in demand. In Fig. 14.1c halving the price causes only a 50% increase in demand.
Figure No. 14.1. Three Forms of Price Elasticity of Demand
Two extreme forms of price elasticity of demand are shown in Fig. 14.2.
Figure No. 14.2. Perfectly elastic and perfectly inelastic demand
Perfectly elastic demand means that demand is infinitely elastic and a small change in price causes an infinitely large change in the quantity demanded. This demand is shown in Fig. 14.2 horizontal line.
Completely inelastic demand is demand, the value of which does not change at all when the price changes. Such demand is shown in Fig. 14.2 vertical line.