Perfectly elastic demand

economic-dictionary

We speak of perfectly elastic demand when a change in price, regardless of its proportion, corresponds to an astronomical variation in the quantity demanded.

Generally, for goods with this type of elasticity, consumers are not willing to pay more than a certain price, regardless of the quantity demanded. There are economic goods that, at a given price, their demand practically tends to infinity.

Look at the graph in the previous figure. The demand curve is visualized as a horizontal line at its price. This form of the demand curve tells us that the quantity demanded tends to infinity before any change in its price. Thus, for any good with this elasticity, its quantity demanded will be infinitely sensitive to any change in price.

If the price of a certain good with this type of elasticity went, for example, from 10 to 12 euros, it would result in a fall to zero in its demand. Conversely, if the price went from 10 to 8 euros, it would result in a demand stream cataloged as infinite.

Elastic demand Inelastic demand Types of elasticity

Example of goods with perfectly elastic demand

Outside of economic theory, it is difficult to find goods that perfectly fulfill the characteristic of this type of elasticity. However, as a typical case, some goods that have this elasticity can be cited.

  • Telephone
  • Drinking water
  • Sale of fruits
  • Sale of vegetables

The reality is that when faced with this type of goods, when the price drops, consumers feel strongly incentivized to continuously consume large quantities of them. Meanwhile, given an increase in its price, consumers feel very disincentive to reduce their consumption dramatically.

The companies that sell this type of goods are in a market of perfect competition. As this type of market is made up of a large number of small companies, none of which can influence the price, the consumer is incredibly motivated by the price.

If a firm decides to raise the price, it will receive the rejection of the consumer, causing its sale to fall to zero. Thus, a firm whimsically decided to lower the price, consumers could demand up to quantities that the firm would not be able to produce.

Perfectly elastic stretch formula

To determine if we are dealing with a good with perfectly elastic demand, the following formula is used:

Calculation example with perfectly elastic demand

The statistical data show that the price of apples has remained at 10 euros since December last year. However, its demand increased from 20 million to 27 million in December this year.

Tags:  markets history biography 

Interesting Articles

add