Illustrative Cases: Graphing Perfectly Elastic & Inelastic Demand

📚 Understanding Perfectly Elastic and Inelastic Demand

In economics, elasticity refers to how much the quantity demanded or supplied of a good changes when its price changes. Demand elasticity, in particular, focuses on how consumer demand reacts to price variations. Two extreme cases are perfectly elastic and perfectly inelastic demand.

📜 History and Background

The concept of elasticity was formalized by Alfred Marshall in his seminal work, "Principles of Economics" (1890). Marshall introduced the idea of price elasticity of demand as a way to quantify the responsiveness of consumers to price changes. The concepts of perfectly elastic and inelastic demand serve as theoretical benchmarks to understand the range of possible demand behaviors.

🔑 Key Principles

• 📏 Perfectly Elastic Demand: This occurs when any increase in price, no matter how small, will cause the quantity demanded to drop to zero. The demand curve is a horizontal line.
• 🎯 Perfectly Inelastic Demand: This occurs when the quantity demanded remains the same regardless of the price. The demand curve is a vertical line.

📈 Perfectly Elastic Demand: Illustrative Cases

Perfectly elastic demand is a theoretical concept, rarely observed in the real world, but useful for understanding market dynamics. It implies consumers are infinitely sensitive to price changes.

• 🍎 Homogeneous Agricultural Products: If many farmers sell virtually identical apples at the market, and one farmer tries to charge even slightly more, consumers will buy from the other farmers. The demand curve faced by an individual farmer is close to perfectly elastic.
• ⛽ Gasoline at Adjacent Stations: Imagine two gas stations right next to each other. If one raises its price by even a penny, most customers will switch to the other station, assuming all other factors are equal (convenience, service, etc.).
• 🌐 Commodities with Perfect Substitutes: If there are two products that are absolutely identical (e.g., generic drugs meeting the exact same specifications), a tiny price increase for one will shift all demand to the other.

Mathematically, perfectly elastic demand is represented as:

$Elasticity = \infty$

This means that the percentage change in quantity demanded is infinite for any percentage change in price.

🧱 Perfectly Inelastic Demand: Illustrative Cases

Perfectly inelastic demand means that the quantity demanded doesn't change at all, regardless of price. This is also a theoretical extreme, but some goods come close.

• 💉 Life-Saving Medication: For someone who needs a specific medication to survive (e.g., insulin for a diabetic), the quantity demanded will likely remain the same regardless of price. They need it to live, and will purchase it even if the price increases substantially.
• 🚑 Emergency Services: In an emergency, the demand for an ambulance or emergency medical care is often perfectly inelastic. People will seek help regardless of the cost.
• 🧂 Salt: For most people, salt is a necessity and a very small part of their budget. A significant price increase in salt would likely not change the amount of salt they purchase.

Mathematically, perfectly inelastic demand is represented as:

$Elasticity = 0$

This means that the percentage change in quantity demanded is zero, regardless of the percentage change in price.

📊 Visual Representation

Consider the following table that helps visualize the impact of price change on demand:

💡 Conclusion

Perfectly elastic and perfectly inelastic demand are theoretical extremes that help illustrate the concept of price elasticity of demand. While rarely found in pure form in the real world, they provide valuable benchmarks for understanding how consumers respond to price changes for different goods and services. Recognizing the factors that contribute to elasticity—such as the availability of substitutes and the necessity of the good—is crucial for businesses and policymakers alike.