π Understanding Elastic Demand
Elastic demand occurs when a change in price leads to a significant change in the quantity demanded. Think of it like a rubber band β a small pull (price change) results in a big stretch (change in demand).
- ποΈ Definition: A measure of how much the quantity demanded of a good responds to a change in the price of that good.
- π Formula: Price Elasticity of Demand (PED) = $\frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}$
- π Example: If the price of pizza decreases by 10% and the quantity demanded increases by 20%, the demand is elastic.
π‘ Understanding Inelastic Demand
Inelastic demand, on the other hand, is when a change in price has little effect on the quantity demanded. Imagine a steel bar β you can push and pull (change the price), but it barely bends (change in demand).
- π‘οΈ Definition: Demand that is not very responsive to a change in price.
- β Formula: PED = $\frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}$ (Result is close to 0)
- β½ Example: Gasoline is a classic example. Even if the price goes up, people still need to drive to work, so demand doesn't change much.
π Elastic vs. Inelastic Demand: A Side-by-Side Comparison
| Feature |
Elastic Demand |
Inelastic Demand |
| Price Sensitivity |
Highly sensitive |
Not very sensitive |
| PED Value |
Greater than 1 (absolute value) |
Less than 1 (absolute value) |
| Curve Slope |
Flatter |
Steeper |
| Examples |
Luxury goods, restaurant meals |
Necessities like medicine, gasoline |
| Availability of Substitutes |
Many substitutes |
Few or no substitutes |
π Key Takeaways
- π― Elastic Demand: Means consumers will significantly change their buying habits when prices fluctuate.
- π‘οΈ Inelastic Demand: Means consumers will continue buying even if prices rise or fall.
- π Business Strategy: Understanding these concepts helps businesses make informed pricing decisions.