What Is the Price Elasticity of Demand?

Economics is not an absolute science. Unlike the more empirical fields of physics or chemistry, economics has to factor in a lot of human qualities and behavior that is, at times, fairly unquantifiable. So economists have to do 🍨their best to predict the likelihood of an event occurring based upon the given data at a particular moment in time.

One example of this forecasting of behavior that economists attempt is the 澳洲幸运5开奖号码历史查询:price elasticity of demand. The price elasticity of demand attemp🧜ts to determine the percentage change in the quantity demanded 🌳of a particular good or service when the price of that good or service changes by a certain percentage.

Perfectly Elastic Demand

Most rational individuals won't pay for a flight with one airline if its competitors charge a lower fee to fly. Given the variety of airlines to choose from and the identical value propositions, demand is perfectly elastic in this scenario. As such, the number of airplane tickets from Bu꧅mpy Ride will drop to zero with a price increase. Economists call this perfectly elastic demand.

The chart below illustrates perfectly 澳洲幸运5开奖号码历史查询:elastic demand.

Example

Here's an example. Let's say you find 20 flights from your town to New York City. All of them have the same price except for one. Airline Bumpy Ride charges $30 more than its industry competitors. Everything about the 20 flights is identical: same in-flight meals, the same departing and arriving times, and they all offer free baggage check-in.

But, the management at Bumpy Ride wants to test the competitive landscape of the 澳洲幸运5开奖号码历史查询:airline industry and gauge what happens to their business if they raise prices by $30 on all flights to New York City. How many peoౠple will be willing to p𒉰ay the additional $30 to book a flight to New York City through Bumpy Ride?

Relatively Elastic Demand

Relatively elastic demand means that the quantity demanded of a good or service will be impacted by a price change in that good or service. A good or service is typically said to have high price elasticity when many 澳洲幸运5开奖号码历史查询:substitutes for that good exist.

Most economists would agree and therefore consider sugar a highly elastic good. The fig✱ure below illustrates the considerable reduction in the amount of sugar demanded as its price increases.

Notice the decline in the quantity demanded of sugar as the p🌼rice increases. The steep d😼ownward slope in the quantity of sugar demanded illustrates that demand for sugar is relatively price-elastic. The change in quantity demanded exceeds the change in price on a relative basis.

Example

Let's stick with sugar to demonstrate how relatively elastic demand works. As you walk down the aisle at a grocery store, you may notice pure sugar as well as many other sugar substitutes.

If the price of pure sugar increases tomorrow by $2 per bag, would you be willing to pay an additional $2 for a bag of sugar when t💯hey are sugar substitutes? Most people would shift their preferences from pure sugar to 🍸a sugar substitute, thereby reducing the quantity demanded of pure sugar.

Perfectly Inelastic Demand

Perfectly 澳洲幸运5开奖号码历史查询:inelastic demand theoretically meಞans that the quantity demanded of a good or service remains constant regardless of price. But, ask yourself whether there is a good or service for which you would pay any amount.

Most people with a terminal illness would pay any amount for a known cure for their disease. Most people would pay any price for water. However, bottled water is relatively price elastic because tap water is in plentiful supply and is practically free. The figure below illustrates perfectly inelastic demandꦡ.

Relatively Inelastic Demand

Gasoline has a relatively inelastic price. Demand remains relatively consistent despite any increases in the price. A drop in demand is smaller than the increase in price on a percentage basis. In a normal market, gas is a relatively inelastic product as the figure below illustrates.

Businesses and consumers both require gas to thrive in this economy🍃. Despite the movement towards alternative fuels, many people are dependent upon gasoline in their daily lives and are neither likely nor capable of switching to alternative fuels as a practical substitute.

If gasoline prices increased 30% tomorrow, would you not go to work? Most people will pay a higher price out of necessity. Of course, there are exceptions. During the oil and gas bubble of 2008, prices soared to a national average peak of approximately $4.10 a gallon and people changed their behavior by demanding less gas. Some economists felt this demand shift contributed to the severe 澳洲幸运5开奖号码历史查询:recession that followed in late 2008 and 2009.

The Bottom Line

Price elasticity of demand is how economists measure demand sensitivity as a result of price changes for a given product. This measurement can be useful in predicting consumer behavior as well as forecasting major events, such as a 澳洲幸运5开奖号码历史查询:recession or recovery.

As consumers, we make decisions that economists measure daily. If the price of a gไood increases and we can live without it, or many substitutes exist, then we consume less of it or maybe none at all. Water, medicine, and gasoline are necessitie༒s that, despite price increases, we will still demand in great quantities.