In the case of elastic demand, the quantity demanded changes relatively strongly in relation to a comparatively small change in price or income. The price elasticity of demand measures how a 1% change in price affects demand.
In this lesson, we’ll explain the types of elastic demand and the impact they can have on pricing decisions. We then provide you with exercises that you can use to deepen your knowledge.
- Synonym: elasticity of demand
- English: Elastic demand
Why is elastic demand important?
Knowing about the elasticity of demand is essential when determining the price of goods and services. In this way, at least one can weigh in advance whether and to what extent demand will change as a result of a price increase or decrease.
For example, a very elastic demand causes a disproportionate change in quantity, which in the event of a price increase can lead to sales losses.
Features of an elastic demand
Whether and to what extent a good is elastic depends primarily on its type:
Luxury goods
If it is a luxury good that can easily be dispensed with, elastic demand is assumed. A price change of 1% leads to a disproportionately high change in demand.
Essential goods
The opposite is true for essential goods such as food. These have a very inelastic demand because they can only be dispensed with to a very limited extent.
Substitute good
An important factor in relation to elasticity is always the possibility of replacing one good with another. These are substitute goods.
If the price of a product rises, this can lead to customers switching to a similar product from another manufacturer. The company can thus bring a decline in sales and consequently lost revenue, a price increase.
Types of elasticity
According to growtheology.com, depending on how elastic the demand for a product is, different types of elasticity with different effects are distinguished from one another:
- completely elastic demand
- very elastic demand
- proportional elastic demand
Completely elastic demand
With completely elastic demand, a minimal change in price causes an infinite change in quantity. This type of elastic demand is therefore only to be understood as a model, since it does not occur in practice.
Completely elastic demand
Very elastic demand
In the case of a very elastic demand, price changes result in a comparatively strong reaction with regard to the quantity sold. This is especially true when there are good substitutes on the market, i.e. goods that can replace the item being examined. Even with a slight price increase, a large number of consumers resort to the substitute. If the price is reduced, large numbers of customers revert to the original product.
Very elastic demand
Proportionally elastic demand
In the case of proportionally elastic demand, the quantity demanded also changes by exactly one percent if the price changes by one percent. This applies to both price increases and price decreases.