What is Perfectly Elastic Demand?
A perfectly elastic demand curve will be a straight line (horizontal) on a graph, where the x-axis will be the quantity, and the y-axis will be the price of the product. The market demand for a product is directly tied to the price of the product.
Perfectly elastic demand is a rare occurrence where the quantity that is demanded change infinitely when there is a little change in the price of the product. It is represented by a horizontal demand curve, as seen above.
Perfect elastic demand is considered a theoretical extreme case and there isn’t really any real-life product that could be considered perfectly elastic. However, the idea is beneficial in economic analysis.
If the price elasticity of demand is bigger than 1 then the demand for the product will be elastic. If the price elasticity of demand is higher than 1, the percentage change in the quantity demanded is greater than the percentage change in price.
If Price elasticity of demand> 1 then,
% change in quantity > % change in price
If you have a price-elastic product, you will not be able to increase your revenue by increasing your price. The moment you raise your price even just a little, the quantity demanded will decrease. Examples of perfectly elastic products are luxury products such as jewels, gold, and high-end cars.
What Is Price Elasticity of Demand?
The price elasticity of demand can be measured by dividing the percentage change in the quantity of the demand by the percentage change in the price of the product.
Price elasticity indicates how the changes in supply and demand influence the price. Products are usually inelastic or elastic:
Inelastic – Inelastic products will have a small change in the price given the change to the supply or demand of the product. For example, gas, everyone still needs to buy gas to travel to work no matter what the cost of gas is now.
Elastic – If a product is elastic a small change in the price will have a big impact on the supply or demand of the product. If a client can easily replace the product with a substitute, then the product will be elastic. For example, if people like both coffee and tea and the price of tea goes up, people will have no problem switching over to coffee. The demand for tea will thus fall, and the demand for coffee will increase as the products are substitutes for each other.
If a purchase is optional, there is a bigger chance that a rise in the price will ensure a fall in the quantity demanded. If you are considering buying a new laptop because your old laptop is slow, but the price goes up just before you buy the computer, there is a good chance that you will not purchase the computer and instead stick it out with your old laptop until it breaks.
Factors that Affect the Elasticity of Demand
The three factors that influence the price elasticity of demand are:
- Substitutes – the more substitutes available for products will make the demand more elastic.
- Necessity – If the product is a basic need, people will be willing to pay a higher price for the product. For example, gas, even if gas doubles, you will still have to fill up your tank to get to the office daily.
- Time – If the price of cigarettes goes up by $1 per pack, and there aren’t a lot of substitutes, the smoker will keep buying his cigarettes, showing an inelastic demand. The price does not influence the quantity of demand. However, if the smoker cannot afford the $1 per pack more that he needs to pay and decides to stop smoking over time, then the price elasticity of cigarettes will become elastic over the long run.
Perfectly Elastic Demand Examples
The price of a cup of coffee increases by $0.20, consumers might decide to instead buy tea of coffee. Coffee is an elastic product because a small increase in the price dropped the quantity demanded.
A company sells apples for $1.50 per pound. Due to cash flow problems, they decided to increase their price to $1.70 per pound. Is the demand perfectly elastic for apples?
The answer is yes, the demand will be perfectly elastic for apples. There are a lot of companies that sell apples at a similar or lower price. Customers can consider buying a substitute product until the price drop.
A supplies perspective will be that the price of a product is determined by the cost of making the product, given that all firms are seeking a profit. The cost of an apple orchard works out to $180 per crate of apples, and each box weighs 150 pounds. The price of the apple cannot be less than $1.20 ($180/150 = $1.20).
The company sells the apples for $1.50 to make a profit. If the consumers do not want to pay $1.50, the company that sells the apples for lower than $1.50 but higher than $1.20 will make a profit and continue to be the supplier of apples. Markets like these rarely exist in the real world.
- The price rise by 5% and the demand declines by 10% – this is an elastic product.
- The price rise by 10% and the demand rise by 10% – this product has a unit price elasticity.
- The price rise by 10% and the demand declined by 5 % – this is an inelastic product.
The price of apples decreases by 5% from $1.50 to $1.41 ($1.50 x 6%). The number of apples sold during this time increased by 20%. How elastic are the apples?
Using the formula from before, we can work this out:
The PED is higher than one, which indicates that apples are highly elastic in terms of demand.
The price of an online streaming app increased by 10% and the consumers decided to switch to a different provider which increase the demand for that provider by 15%. Calculate how elastic the demand for online streaming apps is.
We can use the formula again to calculate the elasticity:
The streaming apps have an elasticity higher than one, which makes the product elastic.
We have a perfectly competitive market for milk meaning we have a market where an infinite number of producers and consumers are in the market, and there is no difference in the milk that is produced by the different producers.
The demand curve for every producer will be perfectly elastic because if any producer increases his price by the smallest amount, his demand will disappear. Customers will switch to a different producer.
Perfectly Elastic Demand Conclusion
- Perfect elastic demand is when the demand for the product is entirely dependent on the price of the product.
- The elasticity of demand is when a change occurs in the price, there will be a change in the demand.
- Examples of elastic goods include gas and luxury cars
- Factors that affect elasticity are substitutes, time, and necessity.
1. What is Perfectly Elastic Demand?
Perfectly elastic demand is when the demand for the product is entirely dependent on the price of the product. This means that if any producer increases his price by even a minimal amount, his demand will disappear. Customers will then switch to a different producer or supplier.
2. Is there an advantage to being in an elastic market?
Being in an elastic market will benefit the companies because if they lower their price slightly, there is a large boost in demand. This is beneficial to the company as this allows them to achieve economies of scale.
3. What are some examples of perfectly elastic goods?
Some products that have perfect elasticity include gas and luxury cars. These types of products can be easily substituted and if their prices rise slightly, the demand will drop.
4. How do we calculate the elasticity of perfectly elastic demand?
The formula for perfectly elastic is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
5. What are the factors that affect the elasticity of demand?
The factors that affect the elasticity of demand are substitutes, necessity, and time. If there are substitutes, demand will be more elastic. For example, if the price of apple increases, customers may switch to oranges. If it is a necessary good, which means people cannot live without them, then the product will have inelasticity in demand.
Another factor that affects the elasticity of demand is time. The longer the time to adapt to a price change, the more elastic the product. For example, if an earthquake occurs and there is a scarcity of food and water, then prices will increase and demand will be much thus making it more inelastic.