Elastic describes the dependence of the demand on the market price. Consumers’ demand reacts to the price changes and that influences the quantity of purchased products.
There are several types of elastic, that can be divided in:
- elastic unit;
- entirely elastic;
- entirely inelastic.
Elastic demand. The demand is elastic when the value of the demand changes more than prices. For example, a 3% increase in price might cause a 10% decrease in demand. That means the coefficient is greater than unity - a 1% change in price changes demand by more than 1%.
Inelastic demand. The value of demand changes to a lesser extent than the price. For example, a 2% increase in price leads to a decrease in demand of only 0.5%. The coefficient is less than one - a 1% change in price changes demand by less than 1%.
Unit elasticity. Occurs when for every 1% change in price the amount of demand changes by 1%. The coefficient is equal to one - a price change by 5% changes demand by the same 5%.
Entirely elastic. Takes place when the value of demand changes unlimitedly even with a small price change.
Entirely inelastic. The value of the demand does not change at any price. Such demand is represented by a vertical demand curve. The volume of demand will not change even if the producers dramatically mark up the goods’ price.
Importance of Elastic
Elastic reflects the effect of the cause on the effect - how much the price rise will result in the quantity of purchases of diapers, phones or clothes.
The price elastic of demand describes how much the price of a product will affect sales. For example, sugar sales with 15% price increase will not lessen, but car sales with 5% price increase might stop for a while.