Price Elasticity of Demand on a Graph - Online Tutor, Practice Problems & Exam Prep

Elasticity of demand varies from perfectly elastic, where demand is infinite at a specific price, to perfectly inelastic, where quantity demanded remains constant regardless of price changes. Elastic demand (elasticity > 1) shows significant changes in quantity with price fluctuations, while inelastic demand (elasticity < 1) indicates minimal changes. Unit elastic demand reflects equal percentage changes in price and quantity. Understanding these concepts is crucial for analyzing market behaviors and consumer choices, particularly in competitive markets and for essential goods like life-saving drugs and gasoline.

Price Elasticity of Demand on a Graph

Now let's see how elasticity can shape the demand curve on the graph. So we're going to talk about all the different cases, but let's start here with this special case called perfectly elastic. We're also going to have perfectly inelastic on the other end of the spectrum. So here, perfectly elastic. This is when the elasticity is so big, it's infinity, right. The elasticity is huge and we get this demand curve that is just a horizontal line, right. Horizontal line and this doesn't appear so often in the real world, but it does kind of exist in these perfectly competitive markets. So underneath you can see that I wrote wheat and foreign currency, right? These are example products that might have an elasticity of infinity and when we think of that it's more of when we're thinking about maybe the individual farmer's demand curve, right? So the idea is this farmer could make any quantity he wanted, right? He could make as much wheat as he wanted, he could make this small amount of wheat right here, right, a small quantity on our quantity axis, or a huge quantity way up here on our quantity axis and the market will buy all of it regardless, but the market will only buy it at this price right here. If he tried to charge a higher price, the market would buy none of his supply, right? So that's the idea is there would be no demand at a different price than this price, but at this price there's an infinite demand, right? They'll buy as much as they can at that price. So that's what, you'll see in the market for wheat or foreign currency, right? There's someone out there that there's the exchange rate on the market right now, say you can get a euro for, I don't know, a dollar 7 or something, there's someone who will trade you 1,000, tens of 1,000 of euros at that price, but if you tried to charge a different price, they wouldn't be having it. Alright, so that is our perfectly elastic demand. That's one extreme of the spectrum where let's go ahead to something a little more realistic in elastic demand and like we said, elastic demand is when our price elasticity is greater than 1, right, and notice we've kind of got this kind of a steep or shallow curve, right? It's kind of almost just a little bit less straight here and this is most products are going to have an elastic demand like this. This is gonna be things like I've got here beef and transportation. It's things that can be easily substituted, So when something has a change in price, people are going to change what they buy, right? So the idea is if beef changed in price, right, if the price of beef now went up $2 per pound or something, people would go buy chicken instead or buy something else, right? So the quantity demanded of beef would be really affected by a change in price. Just like transportation, you know if the price of taxi rides goes up, people are gonna take the bus instead or if the price of cars goes up, people might take the bus or take the taxi or airplane tickets go up, people might take the bus, right. The idea is they have all these different options, so if the price changes, they're gonna take their business elsewhere and you're gonna get this elastic demand where you'll see something like this where we've got you know maybe this price right here and this price right here, right? We only change the price just a little bit right? Price went up just a little bit here and what are we seeing with the quantity demanded over here? Let me use a different color for this one. So up here, p2, right, notice what's happening with the quantity here. You raise that price a little bit and the quantity went way down. Right? The percentage change in that quantity went way down compared to that little change in price. So that's gonna be the elastic demand. Now let's talk about unit elastic. Now this is a special case here where the percentage changes are equal, right? So a 10% increase in price is gonna be a 10% decrease in quantity demanded. And it's hard to find real world examples of this, but I found online that actually clothing is actually pretty close to unit elastic in the sense that a store might have a 40% off sale, right? Where they slash prices by 40% and they'll expect to sell 40% more stuff. So that's about as close as we can get to unit elastic in the real world, and you can see that this curve is kinda standing up a little more, right? Now we're gonna get situations where our percentage change in price so the idea here is we got a percentage change in price maybe something like this. Right? So this percentage change in price here, and we get a similar change in our quantity demanded. Alright. Now I want to make a quick note that in some books I've seen them use a straight line kind of in the middle of unit elastic, or excuse me, in the middle of elastic and inelastic, kind of a straight line that looks like that and it's not totally correct. I mean the idea is there in the sense that we're in the middle of elastic and inelastic, but you're gonna see in further lessons that along a straight line curve the elasticity is actually changing constantly, so it's a lot more clear to use a curve that looks like this where we kind of see a percentage change happening equally rather than a straight line where the slope is what's equal. We're going to talk about that more, but the idea here is that you should see that this graph is gradually kind of turning this way, right. We're kind of we started flat horizontal and now we're kind of going this way and this way and this way and this way, and you're gonna see where we end up here on the bottom of the page with inelastic and perfectly elastic. Notice how it keeps going in that direction, right, it keeps turning up and up and up. So let's talk about this inelastic demand now and this is where quantity demanded doesn't change that much compared to price, right? This is products usually that people are gonna need anyway. So a lot of times people talk about inelastic, they think of cigarettes right? That's a situation where a price change, right, the government puts a new tax or something and the price of cigarettes goes up, but people still buy cigarettes because they're addicted to it, right? Or gasoline, we're addicted to gasoline in the same sense, right? We're kind of at the will of the market, we see those gas prices go up and we're still pumping gas, at least in the short term. Alright, so this is what we see with the inelastic, right? We're gonna see kind of this much steeper getting this way, steeper curve. Right? Where we might have this situation where we've got price and quantity. Right? Where we're at this price and quantity and let's go ahead and say we raise price quite a bit here this time. So p 1 was here. We're gonna raise it way up here to like p2, and notice what's happening with quantity. Barely changing, right? Quantity 1 and quantity 2. Compared to that change in price, that change in quantity was not that much and that's what you can expect from inelastic products like cigarettes or gasoline and now we have our most extreme example of inelastic is where the elasticity of demand equals 0 and we get this vertical line, Right, this is the other extreme of elasticity here where we're at perfectly inelastic and this is very rare to find on the market, but some good examples are actually right behind me. Let me get out of the way. You'll see I've got life-saving drug and table salt. So a life-saving drug, the idea here is that no matter what the price, people are gonna buy this anyway, right? So a life-saving drug is a great example. Table salt, not as much but you can kinda see table salt would almost be more inelastic, but the idea that it's worth so little of our budget, you're gonna see that it kind of fits here too. So a life-saving drug right, this is the idea of this actually happened recently where there was this, I believe it was an AIDS drug that was saying something around $4 a pill, some guy bought up the company and changed the price to like hundreds of dollars per pill right, he increased the price like crazy and everyone was really mad because they needed this drug right, no matter what the price they were gonna have to buy it and they were really upset at this huge price increase. So that's what was happening, right? The quantity demanded for this AIDS drug is going to stay constant whether the price is down here or the price is way up here. Right? So no matter what price we're at, you're gonna see that the demand stays the same and we can kind of see that for table salt, right? Especially when we stay at a very low price, table salt is it costs not much, right? So when we see an increase in the price of salt, people still use salt in all their meals, they love having salt on the table, right? It's just a commonplace addition to our meal time and people aren't going to just stop buying salt because the price went up, you know, from a dollar to a dollar 50 or something like that. So you're gonna kinda see the same quantity demanded of salt regardless of the price in a range, right? So that's what we see, we see kinda going from perfectly elastic to perfectly inelastic, we see the curve kind of making this change like this, and the good way I like to remember so it's like oh, which one's elastic, which one's inelastic, it's kinda silly but this is the way I think of it. When I'm perfectly elastic, I'm feeling elastic, I feel, you know, I feel good, I'm tired, it's like oh I feel super elastic right now. I'm gonna go home and lay in my

Here’s what students ask on this topic:

What is the difference between perfectly elastic and perfectly inelastic demand?

Perfectly elastic demand occurs when the price elasticity of demand is infinite, meaning consumers will only buy at one price and any deviation from this price results in zero demand. The demand curve is a horizontal line. Examples include wheat and foreign currency in perfectly competitive markets. On the other hand, perfectly inelastic demand means the quantity demanded remains constant regardless of price changes, resulting in a vertical demand curve. Examples include life-saving drugs and table salt, where consumers will purchase the same amount regardless of price.

How does elastic demand differ from inelastic demand on a graph?

Elastic demand (elasticity > 1) is represented by a relatively flat demand curve, indicating that a small change in price leads to a significant change in quantity demanded. Examples include beef and transportation, where substitutes are readily available. In contrast, inelastic demand (elasticity < 1) is shown by a steep demand curve, meaning that even large changes in price result in only small changes in quantity demanded. Examples include gasoline and cigarettes, where consumers continue to buy despite price increases.

What is unit elastic demand and how is it represented on a graph?

Unit elastic demand occurs when the percentage change in quantity demanded is equal to the percentage change in price, resulting in an elasticity of 1. The demand curve for unit elastic demand is a curve that stands more upright compared to elastic demand but is not as steep as inelastic demand. An example is clothing, where a 40% price reduction might lead to a 40% increase in quantity sold. This balance between price and quantity changes is what characterizes unit elastic demand.

What are some real-world examples of products with perfectly inelastic demand?

Real-world examples of products with perfectly inelastic demand include life-saving drugs and table salt. For life-saving drugs, regardless of the price, consumers will purchase the necessary amount because their lives depend on it. Similarly, table salt, although not as critical, is a staple in most households, and its low cost relative to the overall budget means that price changes do not significantly affect the quantity demanded.

How does the concept of elasticity of demand apply to transportation?

Transportation is an example of elastic demand because there are many substitutes available. If the price of one mode of transportation, such as taxi rides, increases, consumers can switch to alternatives like buses, trains, or ride-sharing services. This high substitutability means that a small increase in price can lead to a significant decrease in the quantity demanded, illustrating elastic demand.