Perfectly Elastic Demand: The One-Price Rule
What Does Perfect Elasticity Really Mean?
Imagine you are shopping for a specific model of a pencil. You know that every store in your town sells it for exactly $1. Would you pay $1.01 for it? Probably not, because you can simply walk to the next store and get it for the standard price. In economic terms, your demand for that pencil at that specific store is perfectly elastic.
The core idea is absolute sensitivity. The quantity that buyers are willing and able to purchase is entirely dependent on the price being exactly right. The formula for Price Elasticity of Demand (PED) is:
For perfect elasticity: $PED = \infty$
When PED equals infinity ($\infty$), it tells us that the percentage change in quantity demanded is infinitely larger than any percentage change in price. Graphically, this is represented by a horizontal demand curve. At the set price, the quantity demanded can be any amount, but if the price moves up, demand instantly vanishes.
The Math and Graph of Infinite Responsiveness
Let's visualize this with a simple graph description and a table to compare elasticity types.
The demand curve for a perfectly elastic good is a straight, horizontal line. For example, if the market price for a standardized ball bearing is $5, the demand curve is a horizontal line at the price level of $5. The firm can sell as much as it wants at $5, but cannot sell anything at $5.01.
| Elasticity Type | PED Value | Meaning | Demand Curve Shape |
|---|---|---|---|
| Perfectly Inelastic | $PED = 0$ | Quantity demanded does not change when price changes. | Vertical line |
| Inelastic | $0 < PED < 1$ | Quantity demanded changes by a smaller % than price. | Relatively steep |
| Unit Elastic | $PED = 1$ | Quantity demanded changes by the exact same % as price. | Rectangular hyperbola |
| Elastic | $1 < PED < \infty$ | Quantity demanded changes by a larger % than price. | Relatively flat |
| Perfectly Elastic | $PED = \infty$ | Quantity demanded falls to zero with any price increase. | Horizontal line |
Perfect Competition: The Natural Home of Perfect Elasticity
Perfectly elastic demand is a cornerstone of the theoretical model of perfect competition1. This model has several key features that make the demand curve for an individual firm perfectly horizontal:
- Many Buyers and Sellers: No single buyer or seller can influence the market price.
- Identical Products: The goods sold by different firms are perfect substitutes (like shares of a company's stock, or bushels of a specific grade of wheat).
- Perfect Information: All buyers know the price charged by every seller.
- Easy Market Entry and Exit: Firms can freely join or leave the market.
In such a market, if one farmer tries to sell wheat for even one cent more than the current market price, buyers will immediately and completely switch to the countless other farmers offering the identical product at the lower price. The farmer's demand becomes perfectly elastic at the market price.
Real-World Examples and Practical Applications
While a truly perfectly elastic demand is rare in practice, many situations come very close, providing excellent approximations that help us understand the concept.
Example 1: The World Commodity Market. Consider a small wheat farmer in Kansas. The global price of a specific type of wheat (e.g., Hard Red Winter Wheat) is set on international commodity exchanges like the Chicago Board of Trade. Our farmer is a "price taker." He can sell his entire harvest at that world price. If he insists on a higher price, buyers will simply purchase from another source. His individual demand curve is, for all practical purposes, horizontal at the world market price.
Example 2: Foreign Currency for a Tourist. Imagine you are traveling and need to exchange US Dollars for Euros at an airport. You check the rates at ten different exchange bureaus. Nine offer 1 USD = 0.92 EUR. One offers 1 USD = 0.91 EUR. Where will you go? You will go to any of the nine offering the better rate. The demand for the tenth bureau's service is perfectly elastic; at their lower rate, they get zero customers for exchanges.
Example 3: Selling Shares of Stock. If you own 100 shares of a large publicly-traded company like Apple, you can sell them instantly at the current market price (the "bid" price). You cannot successfully sell them for a penny more per share through the normal exchange because millions of identical shares are available at the market price. Your personal supply curve for those shares intersects a perfectly elastic demand from the market.
Important Questions
Q1: Can a real product ever have a truly perfectly elastic demand?
In the strictest theoretical sense, probably not. For demand to be perfectly elastic, products must be 100% identical and buyers must have instant, cost-free access to all sellers. In reality, there are always tiny differences (location, brand perception, slight convenience) or information gaps that prevent absolute perfection. However, markets for standardized commodities (like wheat, gold, or corporate bonds) come extremely close, making the model incredibly useful for analysis and prediction.
Q2: If demand is perfectly elastic, can a company ever increase its revenue?
An individual firm facing a perfectly elastic demand curve cannot increase its price at all, or it will lose all its sales. Therefore, the only way for such a firm to increase its total revenue is to sell a larger quantity. Since it can sell any quantity at the market price, revenue increases linearly with quantity sold: $Total Revenue = Price \times Quantity$. If price is fixed, more quantity equals more revenue. This is why farmers try to maximize their crop yield—they cannot change the market price per bushel.
Q3: How is perfectly elastic demand different from simply "elastic" demand?
It's a difference of degree, moving to an absolute extreme. "Elastic" demand ($PED > 1$) means quantity demanded is highly responsive to a price change. For example, a 10% price increase might cause a 15% drop in sales. Perfectly elastic demand is the ultimate limit: a 0.1% price increase causes a 100% drop in sales (to zero). The demand curve for "elastic" demand is flat but still slopes downward. The curve for "perfectly elastic" demand is completely flat (horizontal).
Conclusion
Perfectly elastic demand, where $PED = \infty$, represents a theoretical extreme that illuminates fundamental economic principles. It shows the ultimate power of consumer choice in a market with perfect substitutes and information. While rarely observed in its purest form, its approximation in highly competitive commodity and financial markets is vital for understanding how prices are determined and why individual sellers in such markets are powerless to set their own prices. Grasping this concept lays the groundwork for understanding more complex market structures, such as monopolies, where the demand curve slopes downward and sellers have significant price-setting power.
Footnote
1 Perfect Competition: A market structure characterized by a large number of small firms, identical products sold by all firms, freedom of entry and exit, and perfect knowledge of prices and technology. It is a theoretical benchmark.
2 PED (Price Elasticity of Demand): A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
3 Price Taker: A firm or individual that must accept the prevailing market price for its product because its individual output cannot affect the market price. This is a key feature of perfectly competitive firms.