- Elastic demand
- An elastic demand is one in which the elasticity is greater than one, showing a high responsiveness to a change in price.
- Inelastic demand
- An inelastic demand is one in which the elasticity is less than one, showing a low responsiveness to price.
Determinants of price elasticity of demand
Can you name the four determinants of price elasticity of demand?
Each one decides how far buyers cut back when the price rises.
Availability of substitutes is how easily buyers can switch to a similar good; the closer and more plentiful the substitutes, the more elastic the demand.
Can you think of an example?
One brand of crisps rises 10 per cent in price and its sales fall 30 per cent, an elasticity of 3, because another brand sits on the same shelf.
Share of income is the proportion of a buyer's income spent on a good; the smaller it is, the less a price rise is noticed and the more inelastic the demand.
Can you think of an example?
A tub of salt going from 60p to 72p is a 20 per cent rise, but it is so small a part of the weekly shop that few buy less.
A necessity is a good buyers feel they cannot do without, such as housing or electricity, so its demand is inelastic while non-essentials are more price-sensitive.
Can you think of an example?
Estimates in the source put the elasticity of electricity at 0.2 and of restaurant meals at 2.27: a 10 per cent price rise cuts electricity use by 2 per cent and restaurant meals by 22.7 per cent.
The time period is how long buyers have to respond; demand is usually more elastic in the long run, once they have found ways to switch.
Can you think of an example?
When energy prices rise, a household can only turn the heating down this winter. Over several years it can insulate the loft, buy a better boiler or move closer to work.