What is Elastic Demand?

Published by Thomas Herold in Economics

'Elastic Demand' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Elastic Demand refers to a factor of demand which is affected by the price. When the quantity of a good demanded responds substantially based on a change in the price or another factor inherent in demand, then the demand for the good in question is said to be elastic. When prices for a good or service decline even a little, consumers will often purchase a significantly greater quantity of the particular item. When prices instead go up a little, the consumers will typically cut back on their purchases while they wait on the prices of the good or service to return to the prior level.

When services and goods feature elastic demand, this describes items which the consumers are happy to comparison shop around for a more attractively priced substitute. The reason for this truth is that the buyers are not desperately in need of having the given item. This could be because they do not require it each day, or because there are many similar comparable choices which may be offered at more advantageous prices.

It is actually the laws of demand which lead the correlation between quantity purchased and price per item. This law claims that the price of an item is inversely related to the amount which consumers will purchase. As prices go higher, it is human nature for individuals to purchase fewer items. Elasticity of demand describes by how much the item quantity they purchase will drop as the price rises.

Where goods and services are concerned, there are actually two more kinds of elastic demand. Both of these quantify how the numbers purchased will specifically change as the price declines. These are inelastic demand and unit elastic demand. Inelastic demand simply means that the amount of the goods or services which consumers demand will change less radically than the associated price will. Conversely, unit elastic demand means that the amount of a given good or service which individuals demand will alter at the same percentage rate by which the price varies.

To figure out the elastic demand formula, one simply takes the quantity demanded percentage change and divides this figure by the price percentage change. Demand is said to be elastic as the percentage change of the quantity which consumers demand is greater than the associated price change percentage. This would mean the ratio is higher than one. As an example, if demanded quantity increased by 10 percent as the price declined by an associated fiver percent, then the ratio would be .10 divided by .05 for a total demand elasticity result of 2.00. It would mean that the demand was highly elastic.

Another scenario which may result is called perfectly elastic demand. This happens if and when the demanded quantity increases to infinity as the price declines by any percentage amount. Of course in the real world this is not possible. It does serve to illustrate the point that elastic demand possesses a ratio higher than one.

Conversely, inelastic demand is present as the demanded quantity increases by a smaller percentage than does the drop in price. Consider this example. When the quantity demanded increased by two percent as the associated price dropped by five percent, then the ratio proves to be .02 divided by .05. The result is .40 demand elasticity, which is under one. This means the demand is inelastic, and the item can not be easily substituted or replaced by the markets.

Unit elastic demand is present as the demanded quantity varies by exactly the same percentage amount as the price change does. This would mean the ratio proved to be exactly one. The example with this base case is easy to understand. If the demanded quantity rose by five percent as a result of an associated five percent decline in the price, then the .05 divided by .05 would yield a result of one.

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The term 'Elastic Demand' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.