Elastic Demand: Definition, Formula, Curve, Examples

When the Amount Bought Really Responds to Price

elastic demand curve
A perfectly elastic demand curve is horizontal because a imperceptible change in price will create an infinite change in demand.

Elastic demand is when the quantity responds a lot to price or one of the other determinants of demand. Typically, it's when consumers are sensitive to price changes. That means, if the price goes down just a little, they'll buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for them to return to normal. 

If a good or service has elastic demand, it means consumers will do a lot of comparison shopping.

That's because they aren't desperate to have it, they don't need it every day, or there are a lot of other similar choices. 

The Law of Demand guides the relationship between price and the quantity bought. That law states that the quantity purchased has an inverse relationship with price.  When prices rise, people buy less. The elasticity of demand tells you how much the amount bought decreases when the price increases.

Other Types

There are two other types of demand elasticity, which measures how much the quantity purchased changes when the price does. They are:

  1. Inelastic demand, which is when the quantity demanded changes less than the price does.
  2. Unit elastic demand, which is when the quantity demanded changes the same percent that the price does.

Formula

The formula for elastic demand is the percent change in the quantity demanded divided by the percent change in the price. 

Elastic demand is when the percent change in the quantity demanded exceeds the percent change in price.

That makes the ratio more than one. For example, say the quantity demanded rose 10% when the price fell 5%. The ratio is 0.10/0.05 = 2.00.

Perfectly elastic demand is when the quantity demanded skyrockets to infinity when the price dropped any amount. That, of course, could not happen in real life. But it illustrates the concept that elastic demand has a ratio of anything more than one.

Inelastic demand is when the quantity demanded rises by a lower percent than the price drop. For example, if the quantity rose 2% when the price fell 5%. That ratio is .02/.05 = .40, or less than one.

Unit elastic demand is when the quantity demanded changes the same percent as the change in price. Therefore, the ratio is one.

To illustrate, say the quantity demanded increased 5% in response to a price drop of 5%. The ratio is .05/.05 = 1. The price was a negative move while the quantity was a positive move. But everyone omits the minus sign since they all know that demand moves inversely to price.

Elastic Demand Curve

The demand curve is an easy way to determine if the demand is elastic. The quantity demanded will change much more than the price. As a result, the curve will look more low and flat than the unit elastic curve, which is a diagonal. The more elastic the demand, the flatter the curve. The graphic above shows the perfectly horizontal line of a perfectly elastic demand curve. 

The demand curve is based on the demand schedule. This table describes exactly how many units will be bought at each price.

Price is one of the five factors that determine demand.  There's a sixth, number of buyers, that drives Aggregate Demand.

 The important thing to know is that the demand curve only shows how the quantity changes in response to price, ceteris paribus (all other things being equal). If one of the other determinants change, it will shift the entire demand curve. That means more (or less) will be demanded, even though the price remains the same.

Examples

In real life, there is nothing that has perfectly elastic demand. However, many commodities approach that situation because they are highly competitive. The price is pretty much the only thing that matters.

Say two stores are selling identical ounces of gold. One sells it for $1,800 an ounce while the one next door sells it for $1,799 an ounce.

If there were perfectly elastic demand, no one would buy the most expensive gold. The less expensive dealer sells as much as he has.

Another good example of elastic demand is housing. That's because there are so many different housing choices.  People could live in a townhome, condo, apartment or even with friends or family. 

Clothing also has elastic demand. True, people have to wear clothes, but there are many choices of what kind of clothing, and how much to spend. Stores offered sales, and as a result clothing prices dropped to maintain demand. Small stores that couldn't offer huge discounts went out of business. During the Great Recession, they were replaced by second-hand stores that offered quality used clothing at steeply discounted prices.