This shows a perfectly elastic demand curve. Say, for example, if the price of cruises to the Caribbean decreased, everyone would buy tickets (i.e., quantity demanded would increase to infinity), or when the price of cruises to the Caribbean increased, not a single person would be on the boat (i.e., quantity demanded would decrease to zero). Perfectly elastic demand is an “all or nothing” thing!įigure 2. It’s a situation where consumers are extremely sensitive to changes in price. A perfectly elastic demand curve is horizontal, as shown in Figure 2, below. While it’s difficult to think of real world example of infinite elasticity, it will be important when we study perfectly competitive markets. Similarly, quantity demanded drops to zero for any increase in the price.
We will describe each case.Ī perfectly (or infinitely) elastic demand curve refers to the extreme case in which the quantity demanded (Qd) increases by an infinite amount in response to any decrease in price at all. There are also two extreme cases of elasticity: when computed elasticity equals zero and when it’s infinite. Measured elasticities decreases as one moves down the demand curve from left to right. As you saw earlier, price elasticity of demand ranges from more than 1 at high prices and less than 1 at low prices. Note that the epsilon symbol, ε, is often used to represent elasticity.įigure 1. As one moves down the demand curve from top left to bottom right, the measured elasticity is much greater than one (very elastic), then just greater than one (somewhat elastic), then equal to one (unitary elastic, then less than one (somewhat inelastic), and finally much less than one (very inelastic). It is important to note that both elastic and inelastic are relative terms, as shown in Figure 1, below. Three Categories of Elasticity: Elastic, Inelastic, and Unitary These ranges are summarized in Table 1, below. In other words, the percent change in quantity demanded is equal to the percent change in price, so the elasticity equals 1. Unitary elasticities indicate proportional responsiveness of demand. Computed elasticities that are less than 1 indicate low responsiveness to price changes and are described as inelastic demand. We mentioned previously that elasticity measurements are divided into three main ranges: elastic, inelastic, and unitary, corresponding to different parts of a linear demand curve.ĭemand is described as elastic when the computed elasticity is greater than 1, indicating a high responsiveness to changes in price.
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How to we keep these different meanings understood? That is the purpose of this section. We can also describe elasticity as perfectly elastic or perfectly inelastic. We also describe the responsiveness as (relatively) elastic or (relatively) inelastic. We use the word elasticity to describe the property of responsiveness in economic variables. The language of elasticity can sometimes be confusing.
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