An elastic demand is that demand that is sensitive to a change in price. In this way, a small variation in the price causes a more than proportional change in the quantity demanded. Thus, for example, if the price increases by 10% and in response the quantity demanded is reduced by more than 10%, then the demand is said to be elastic.
The elasticity of demand, also known as the elasticity-price of demand , is defined as the percentage change of the quantity demanded before a percentage change in the price. It is usually expressed in absolute terms and has the following form:
QD = Amount demanded
P = Price
Note: We have omitted the negative sign at the beginning of the elasticity formula. That is, it is presented as if it were in absolute value.
The advantage of this demand response measure is that the unit of measure is free.
When the result of the previous formula is> 1 it is said that the demand is elastic. In this way, the percentage variation of the quantity demanded is greater than the percentage variation of the price.
Determinants of elastic demand
There are several factors that determine the elasticity of demand at a given time. Here are some factors that make demand tend to be more elastic:
- Goods with more and better substituteshave a more elastic demand than goods that lack substitutes
- In the long termthe demands are more elastic than in the short term
- The goods in which the consumer spends an important part of his budgetusually have a more elastic demand than those in which the portion of the expenditure is insignificant
An example of elastic demand may be the demand for medium or low quality clothing. Because there are many substitutes and that it is not an essential asset (most of the time), people show high price sensitivity.
Origin of the concept
In 1850 the French economist Auguste Cournot already realized that the quantity demanded is a function of its price. In this way, if the price of the good increases while the rest of the prices and other variables remain constant, the quantity demanded tends to fall.
Later, Alfred Marshall in his book Principle of Economics of 1890 developed this topic in greater detail.
Graphical representation of elastic demand
The demand curve is the graph that represents the relationship between the price of a given good or service and the level or quantity of demand that consumers accept. When the demand is elastic, the quantity demanded will vary more in percentage than the price variation:
Perfect elastic demand
The perfect elastic demand is that in which the demand varies dramatically in the face of price movements, that is, the result of the formula above is infinite. If the price falls or rises 1%, the demand becomes infinite or zero. Therefore, prices do not change. This case does not exist in reality, but it is useful to use it as a theoretical example and see where the endpoint would be. A perfect inelastic demand would occur for example in cases of perfect competition .
A perfect elastic demand will be completely horizontal (on the contrary the perfect inelastic demand would be completely vertical):