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Demand for a product is sensitive or responsive to price change. The variation in demand is, however, not uniform with a change in price. In case of some products, a small change in price leads to a relatively larger change in quantity demanded.

Explanation with Examples and Diagrams:

For example, a decline of 1% in price leads to 8% increase in the quantity demanded of a commodity. In such a case, the demand is said to be elastic. There are other products where the quantity demanded is relatively unresponsive to price changes. For example, a decline of 8% in price, gives rise to 1% increase in quantity demanded. Demand here is said to be inelastic.

The terms elastic demand and inelastic demand do not indicate the degree of responsiveness and unresponsiveness of the quantity demanded to a change in price.

Five Degrees or Levels of PED:

Therefor, the economists described various degrees or levels of price elasticity of demand (PED) into five categories.

(1) Perfectly Elastic Demand:

Definition:

A demand is perfectly elastic when a small increase in the price of a good leads its demand to zero. Perfect elasticity implies that individual producer can sell all his products at a ruling price but cannot charge a higher price. If any producer tries to charge even one penny more, no one would buy his product. People would prefer to buy from another producer who sells the goods at the prevailing market price.

Diagram:

A perfect elastic demand curve is illustrated in diagram 6.1.

It shows that the demand curve DD/is a horizontal line which indicates that the quantity demanded is extremely (infinitely) response to price. Even a slight rise in price (say $4.02), drops the quantity demanded of a good to zero. The curve DD/is infinitely elastic.

This elasticity of demand as such is equal to infinity.

(2) Perfectly Inelastic Demand:

Definition:

When the quantity demanded of a good dose not change at all to whatever change in price, the demand is said to be perfectly inelastic or the elasticity of demand is zero (PED = 0).

Diagram:

A perfect inelastic demand curve is illustrated in diagram 6.2.

In diagram 6.2, a rise in price from OA to OC or fall in price from OC to OA causes no change (zero responsiveness) in the quantity demanded.

(3) Unitary Elasticity of Demand:

Definition:

When the quantity demanded of a good changes by exactly the same percentage as price, the demand is said to be a unitary elasticity.

For example, a 30% change in price leads to 30% change in quantity demand = 30% / 30% = 1.

One or a one percent change in price causes a response of exactly a one percent change in the quantity demand.

Diagram:

A unitary elastic demand curve is illustrated in diagram 6.3.

In above diagram (6.3) DD/demand curve with unitary elasticity shows that as the price falls from OA to OC, the quantity demanded increases from OB to OD. On DD/demand curve, the percentage change in price brings about an exactly equal percentage in quantity at all points a, b. The demand curve of elasticity is, therefore, a rectangular hyperbola.

(4) Elastic Demand:

Definition:

If a one percent change in price causes greater than a one percent change in quantity demanded of a good, the demand is said to be elastic.

Alternatively, we can say that the elasticity of demand is greater than. For example, if price of a good change by 10% and it brings a 20% change in demand, the price elasticity is greater than one (PED > 1).

Diagram:

An elastic demand curve is illustrated in diagram 6.4.

In diagram (6.4) DD/ curve is relatively elastic along its entire length. As the price falls from OA to OC, the demand of the good extends from OB to ON i.e., the increase in quantity demanded is more than proportionate to the fall in price.

(5) Inelastic Demand:

Definition:

When a change in price causes a less than a proportionate change in quantity demanded, then the demand is said to be inelastic.

The elasticity of a good is here less than 1 or less than unity (PED < 1). For example, a 30% change in price leads to 10% change in quantity demanded of a good.

Diagram:

An inelastic demand curve is illustrated in diagram 6.5.

In diagram (6.5) DD/ demand curve is relatively inelastic. As the price fall from OA to OC, the quantity demanded of the good increases from OB to ON units. The increase in the quantity demanded is here less than proportionate to the fall in price.

Note: It may here note that the slope of a demand curve is not a reliable indicator of elasticity. A flat slope of a demand curve must not mean elastic demand. Similarly, a steep slope on demand curve must not necessarily mean inelastic demand.

The reason is that the slope is expressed in terms of units of the problem. If we change the units of problem, we can get a different slope of the demand curve. The elasticity, on the other hand, is the percentage change in quantity demanded to the corresponding percentage change in price.