Perfectly elastic demand
| Perfectly elastic demand |
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Perfectly elastic demand refers to a situation in which a small change in price results in a large change in the quantity demanded. In other words, the quantity demanded is infinitely sensitive to changes in price. This is typically represented by a demand curve that is a straight line that is perfectly horizontal, which means that the elasticity of demand is infinite. This is a theoretical concept that is rarely observed in the real world, as most goods and services have some level of price elasticity, meaning that the quantity demanded changes in response to changes in price, but not infinitely.
Perfectly elastic demand examples
Examples of goods or services that may have perfectly elastic demand include:
- Commodities such as wheat or gold, for which there are many substitutes and no brand loyalty.
- Public goods such as national defense, where the government provides the service and individuals cannot opt out.
- Necessities such as water or electricity, for which consumers have little choice but to pay the asking price.
- Goods that have a wide range of competitors, such as generic products like sugar or salt.
- Inelastic goods such as life-saving drugs which people will buy no matter the price.
Please note that these examples are theoretical, perfectly elastic demand is very rare in the real world. Most goods and services have some level of price elasticity, meaning that the quantity demanded changes in response to changes in price, but not infinitely.
Perfectly elastic demand formula
The formula for calculating price elasticity of demand is:
In the case of perfectly elastic demand, the quantity demanded changes by an infinite amount in response to a small change in price. Therefore, the elasticity of demand is infinite.
Alternatively, it can be represented by the formula:
Elasticity = (dQ/Q) / (dP/P)
where dQ is the change in quantity, Q is the original quantity, dP is the change in price, P is the original price.
It can also be represented by the formula
Elasticity = -(Q/P) * (dP/dQ)
In this case, Elasticity = -∞
Please note that this is a theoretical concept and it is very rare to observe perfectly elastic demand in the real world. Most goods and services have some level of price elasticity, meaning that the quantity demanded changes in response to changes in price, but not infinitely.
References
- Braulke, M., & Paech, N. (2001). The Competitive Industry in Short-Run Equilibrium: The Impact of Less than Perfectly Elastic Markets. In Beiträge zur Mikro-und zur Makroökonomik (pp. 93-98). Springer, Berlin, Heidelberg.
- Arnott, R., De Palma, A., & Lindsey, R. (1993). A structural model of peak-period congestion: A traffic bottleneck with elastic demand. The American Economic Review, 161-179.
- Cantarella, G. E. (1997). A general fixed-point approach to multimode multi-user equilibrium assignment with elastic demand. Transportation Science, 31(2), 107-128.
