Elastic Demand

Definition

Elastic demand refers to a situation where the quantity demanded of a good or service is highly responsive to changes in its price. When demand is elastic, a small change in price leads to a relatively large change in the quantity demanded.

5 Must Know Facts For Your Next Test

1. Elastic demand is characterized by a price elasticity of demand greater than 1, meaning the percentage change in quantity demanded is greater than the percentage change in price.
2. Goods with elastic demand tend to have close substitutes, are considered luxuries, or have a large share of the consumer's budget.
3. Elastic demand allows firms to increase revenue by lowering prices, as the increase in quantity demanded more than offsets the lower price.
4. Elasticity of demand can vary along a demand curve, with demand being more elastic at higher prices and less elastic at lower prices.
5. Understanding the elasticity of demand is crucial for firms in setting prices and maximizing profits.

Review Questions

• Explain how elastic demand relates to the concept of polar cases of elasticity and constant elasticity.
  • Elastic demand is one of the polar cases of elasticity, where the quantity demanded is highly responsive to changes in price. This is in contrast to the other polar case of inelastic demand, where quantity demanded changes little in response to price changes. Elastic demand is also related to the concept of constant elasticity, where the price elasticity of demand remains the same regardless of the price level. Firms facing elastic demand can increase revenue by lowering prices, as the increase in quantity demanded more than offsets the lower price.
• Describe how the concept of elastic demand relates to pricing decisions and the impact on revenue.
  • Elastic demand is a crucial consideration for firms when setting prices. When demand is elastic, a small decrease in price can lead to a relatively large increase in quantity demanded. This allows firms to increase revenue by lowering prices, as the increase in quantity sold more than offsets the lower price per unit. Conversely, when demand is inelastic, firms may be able to increase revenue by raising prices, as the decrease in quantity demanded is relatively small compared to the higher price. Understanding the elasticity of demand is essential for firms to make informed pricing decisions and maximize their revenue.
• Analyze how changes in income and prices can affect consumption choices in the context of elastic demand.
  • In the context of elastic demand, changes in income and prices can have a significant impact on consumption choices. When demand is elastic, consumers are highly responsive to changes in price. A decrease in price will lead to a relatively large increase in quantity demanded, as consumers are willing to purchase more of the good or service. Conversely, an increase in price will lead to a relatively large decrease in quantity demanded. Additionally, changes in income can also affect consumption choices when demand is elastic. An increase in income may lead to a greater increase in quantity demanded, as consumers have more purchasing power and are willing to buy more of the good or service. Understanding how elastic demand influences consumption choices is crucial for firms to anticipate and respond to changes in the market.

Related terms

Inelastic Demand:

Inelastic demand is a situation where the quantity demanded of a good or service changes little in response to changes in its price.

Price Elasticity of Demand:

Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

Constant Elasticity of Demand: Constant elasticity of demand is a situation where the price elasticity of demand remains the same regardless of the price level.