Elasticity of Demand: Types and Determinants

  • Unit Elastic Demand

    • Occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price. For example, a 15%15\% price change leads to a 15%15\% quantity change, indicating a proportional reaction.

  • Perfectly Inelastic Demand (Extreme Case)

    • Consumers are completely insensitive to changes in price.

    • The demand curve is a perfectly vertical line.

    • Example: Insulin

    • A diabetic individual needs a specific quantity of insulin daily (e.g., 22 shots), regardless of price.

    • If the price of insulin is $3, $4, or even $100, the quantity demanded remains 22.

    • Consumer Perception

    • Consumers feel they absolutely need the product.

    • As price goes up, the quantity demanded does not change at all.

    • Conversely, if the price for a necessary drug drops, the quantity demanded also does not change (e.g., a diabetic wouldn't take more insulin than prescribed).

    • Characteristic: Demand does not change with any change in price.

  • Perfectly Elastic Demand (Other Extreme)

    • Consumers are hypersensitive to changes in price.

    • The demand curve is a perfectly horizontal line.

    • Analogy: Trampoline

    • A trampoline's sensitivity to movement illustrates the extreme responsiveness.

    • Behavior: Any increase in price, even a small amount, causes consumption to drop to zero.

    • Example: If a product's price is $5 and it's raised to $5.50, consumers will stop buying it entirely, shifting from buying