1.2.4

Elasticities of Demand 2

Test yourself

Perfectly Elastic Demand vs Perfectly Inelastic Demand

The effect of things like government intervention and changes in income may have different impacts on a market if demand is perfectly elastic or perfectly inelastic.

Illustrative background for Perfectly elastic demandIllustrative background for Perfectly elastic demand ?? "content

Perfectly elastic demand

  • Perfectly elastic demand - PED = +/- infinity.
    • Any price increase will cause demand to drop to zero.
Illustrative background for Perfectly inelastic demandIllustrative background for Perfectly inelastic demand ?? "content

Perfectly inelastic demand

  • Perfectly inelastic demand - PED = zero.
    • Any price change won't affect demand.
Illustrative background for 'I' for inelastic!Illustrative background for 'I' for inelastic! ?? "content

'I' for inelastic!

  • A perfectly inelastic demand curve would look vertical on a diagram as the quantity demanded would be the same regardless of the price.
  • An easy way to remember this is that the more inelastic demand is, the more the demand curve looks like an 'i' for 'inelastic'.

What Affects the Elasticity of Demand?

There are a number of factors that affect the elasticity of demand.

Illustrative background for Availability of substitute goods/servicesIllustrative background for Availability of substitute goods/services ?? "content

Availability of substitute goods/services

  • The more substitutes there are available, the more price elastic a good is.
  • This is because it is easy to find an alternative product as a replacement if the price of one good rises.
    • E.g. washing detergents are fairly price elastic. If the price of one goes up, you can easily swap it for an alternative.
Illustrative background for Percentage of income and timeIllustrative background for Percentage of income and time ?? "content

Percentage of income and time

  • The higher the proportion of income spent, the more elastic the good or service is. People are more sensitive to the price of a TV vs a Mars bar.
  • Goods tend to be more price elastic in the long run because time can be devoted to searching for appropriate alternatives.
Illustrative background for Type of goodIllustrative background for Type of good ?? "content

Type of good

  • The nature of the good can influence how elastic the demand is.
  • Addictive goods tend to be more price inelastic because a change in price is unlikely to affect quantity significantly (if users feel they have a need for the product).
    • E.g. cigarettes.
  • But items that are not absolutely essential are more elastic.
    • E.g. kitchen roll.

Impact of indirect taxes

  • The impact of an indirect tax depends on the PED of the good or service.
  • Picture a tax as effectively shifting supply to the left. This leads to a fall in demand.
  • However, if the good has inelastic demand, the reduction in consumption will be small. The consumer burden is significantly higher than the producer burden.
  • The reverse is true for an indirect tax on a good or service with elastic demand.
  • Therefore PED is central to the impact of an indirect tax.
Illustrative background for Impact of subsidiesIllustrative background for Impact of subsidies ?? "content

Impact of subsidies

  • The impact of a subsidy depends on the PED of the good or service.
  • Effectively, a subsidy shifts the supply curve to the right. This means demand should increase.
  • If the good or service has an inelastic demand, the price will drop more than the quantity increases.
  • If the good or service has an elastic demand, the price will drop less than the quantity increases.
  • Therefore PED is central to the impact of a subsidy.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

Go student ad image

Unlock your full potential with GoStudent tutoring

  • Affordable 1:1 tutoring from the comfort of your home

  • Tutors are matched to your specific learning needs

  • 30+ school subjects covered

Book a free trial lesson