Elastic demand occurs when the price of a good or service affects 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.
Definition and Examples of Elastic Demand
Whether demand for an item or service is elastic or inelastic is measured by its change in price with respect to its change in demand. If an item's change in price changes in proportion to its change in demand, it is neither elastic nor inelastic. In other words, an item has elastic demand if its demand changes more than its price changes.
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 another sells it for $1,799 an ounce. If demand for gold were perfectly elastic, no one would buy the more expensive gold. Instead, everyone would buy gold from the dealer that sells it for less.
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 large changes to demand.
In a real-life situation of almost perfect elasticity, some people might 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.
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 (i.e., this product's demand is more elastic than that product's).
A more realistic example of elastic demand is housing. There are 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 about 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.
How Does Elastic Demand Work?
The law of demand guides the relationship between price and the quantity demanded. 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.
Using the law of demand, if an item's price increases, demand for it should decrease. The amount of change, measured by percentage, is used to figure out if demand is elastic or not. Change in demand is compared to change in price to figure it out. If the comparison result is one, then the item is considered to have unified elasticity—price and demand that change proportionally. If it is greater than one, it is elastic; if it is less than one, it is inelastic.
For instance, if the price for widgets went up 1% and demand went down 1%, you'd divide the change in demand by the change in price:
.01 ÷ .01 = 1
Widgets have unified elasticity in this case. However, if the price for widgets went up 1% and demand went down 5%, you'd get:
.05 ÷ .01 = 5
In this case, widgets are elastic because their demand changed drastically with the price change. So, since widgets have elastic demand, consumers will look around for the best prices because merchants and suppliers cannot corner the market with absurd prices.
How to Use a Demand Curve Graph
You can visualize this elastic demand with a demand curve graph. In an elastic demand scenario, the quantity demanded changes much more than the price. When the 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 demanded changes in response to price ceteris paribus. This Latin phrase means "other things being equal." In economics, it refers to how something is affected when all other factors that influence it remain the same. If one of the other determinants of demand changes, the entire demand curve can change and skew the perception of elasticity.
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.
Perfectly elastic demand is when the quantity demanded skyrockets to infinity when the price drops any amount. This is not something that would happen in real life. However, many commodities close the gap between elastic and perfectly elastic because they are highly competitive. The price is essentially the only thing that matters for these items.
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. Demand changes more than price when it is elastic, and price changes more than demand when it is inelastic. In other words, an item has an inelastic demand when consumers are willing to tolerate greater changes in 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.
Some goods like staple food items also have inelastic demand. If the price for staples like fruits and vegetables or meat and poultry went up, you'd be forced to pay the higher price.
Elastic demand is more likely to apply to luxuries and non-essentials. This is because consumers have many options for non-essential items, such as off-brands or imitations—they also have the choice not to purchase it at all.
- 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.
- Items with elastic demand are generally non-essential items.