Elastic demand occurs when the price of a good or service has a big effect on consumers' demand. If the price goes down just a little, consumers will buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for prices to return to normal.
Here's what you need to know about elastic demand, and how it compares to other forms of demand.
What Is Elastic Demand?
Price is one of the five determinants of demand, but it doesn't affect the demand for all goods and services equally. When price heavily affects demand, that good or service is said to have "elastic demand." The name comes from the way economists think about the demand for that good or service—it stretches easily, and a slight price change results in massive changes to demand.
You can talk about elastic demand as a type of demand (when changes in demand outpace changes in price), or you can talk about elastic demand in terms of relativity (eg, this product's demand is more elastic than that product's).
How Does Elastic Demand Work?
The law of demand guides the relationship between price and the quantity bought. It 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.
If a good or service has elastic demand, it means consumers will do a lot of comparison shopping. They do this when they aren't desperate to have it or they don't need it every day. They'll also comparison shop when there are a lot of other similar choices.
How to Use a Demand Curve Graph
You can visualize this phenomenon with a demand curve graph. In an elastic demand scenario, the quantity demanded will change much more than the price. When price is on the y-axis and demand is on the x-axis, the elastic demand curve will look lower and flatter than other types of demand. The more elastic the demand is, the flatter the curve will be.
The demand curve—and any discussion about price elasticity—only shows how the quantity changes in response to price "ceteris paribus," a Latin phrase that means "all other things being equal." If one of the other determinants of demand changes, it will shift the entire demand curve.
The demand curve is based on the demand schedule, which displays the same data in a table format. This table describes exactly how many units will be bought at each price.
To measure the elasticity of demand, divide the percentage change in quantity demanded by the percentage change in price. When this ratio gives you a result of more than one, that demand is considered elastic. For example, say the quantity demanded rose 10% when the price fell 5%. The ratio is 0.10/0.05 = 2.
Perfectly elastic demand is when the quantity demanded skyrockets to infinity when the price drops any amount. That, of course, could not happen in real life. However, many commodities approach that scenario because they are highly competitive. The price is essentially the only thing that matters.
Examples: Commodities, Housing
As an example of perfectly elastic demand, imagine that two stores sell identical ounces of gold. One sells it for $1,800 an ounce while the other one sells it for $1,799 an ounce. With perfectly elastic demand, no one would buy the more expensive gold. Instead, all consumers would buy gold from the dealer that sells it for less.
In the real-life situation of almost perfect elasticity, many people, but not all of them, will choose the cheaper gold over the more expensive one. Some may still pay more for gold because they like the other shop owner better, or the other shop is closer to their home and they don't want to drive across town to the store with the cheaper gold.
A more realistic example of elastic demand is housing. There are so many different housing choices. People could live in a suburban home, a condo, or rent an apartment. They could live by themselves, with a partner, with roommates, or with family. Because there are so many options, people don't have to pay a specific price.
Clothing also has elastic demand. Everyone needs to wear clothes, but there are many choices as to what kind of clothing they want to wear and how much they want to spend. When some stores offer sales, other stores have to lower their clothing prices to maintain demand. During the Great Recession, many clothing stores were replaced by second-hand stores that offered quality used clothing at steeply discounted prices.
Elastic Demand vs. Inelastic Demand
|Elastic Demand vs. Inelastic Demand|
|Elastic Demand||Inelastic Demand|
|Demand changes more than price||Price changes more than demand|
|Often applies to products and services for which consumers have many options||Often applies to products and services for which consumers have few alternatives|
|Examples include luxuries||Examples include basic goods|
The opposite of elastic demand is inelastic demand. Whereas demand changes more than price with elastic demand, price changes more than demand with inelastic demand. In other words, consumers are willing to tolerate greater changes to price before they alter their behavior. The price of a product with inelastic demand could suddenly rise, but consumers would be unlikely to consider alternatives—or there aren't any alternatives to consider.
Elastic demand is more likely to apply to luxuries. Consumers have a lot of options when it comes to luxuries—including the choice not to purchase anything. Basic goods like food items, on the other hand, have inelastic demand. If the price for fruit and vegetables suddenly shot up, you can't simply stop eating fruits and vegetables, so you'll be forced to pay the higher price.
There's also "unit elastic demand," which is essentially the perfect middle ground between inelastic and elastic demand. When demand changes by the exact same amount as price, that's known as unit elastic demand.
- Elastic demand is when a product or service's demanded quantity changes by a greater percentage than changes in price.
- The opposite of elastic demand is inelastic demand, which is when consumers buy largely the same quantity regardless of price.
- The demand curve shows how the quantity demanded responds to price changes. The flatter the curve, the more elastic demand is.