⚖️ Elastic Demand: When Buyers Vote With Their Wallets
🧭 Elastic & Inelastic: The Two Personalities of Demand
Imagine you and your friends always buy a special brand of fruit juice. One day, the price jumps from $2.00 to $2.20. If almost everyone stops buying it and switches to apple cider, that juice has elastic demand. The quantity demanded is super responsive. On the other hand, if the price of your favourite medicine goes up and you still buy it, that’s inelastic demand. Elasticity is measured using a simple number called the price elasticity of demand (PED).
If $|PED| > 1$, demand is elastic.
If $|PED| < 1$, demand is inelastic.
If $|PED| = 1$, it’s unit elastic.
Let’s compute an example. Suppose a pizza slice goes from $3.00 to $3.60 – that’s a 20% price increase. If the pizzeria sees a 40% drop in slices sold, then PED = $40\% / 20\% = 2$. Since 2 is greater than 1, the demand is elastic. People quickly say “no thanks” to expensive pizza.
| PED Value (absolute) | Type of Demand | What happens when price rises? |
|---|---|---|
| PED = 0 | Perfectly inelastic | Quantity does not change (life-saving insulin) |
| 0 < PED < 1 | Inelastic | Quantity falls a little (gasoline, cigarettes) |
| PED = 1 | Unit elastic | Total revenue stays same |
| PED > 1 | Elastic | Quantity falls a lot (restaurant meals, soda) |
| PED = ∞ | Perfectly elastic | Any price rise drops quantity to zero (identical farm crops) |
🔍 The Elasticity Detectors: Four Factors That Make Demand Bouncy
Why is demand for some goods as stretchy as a rubber band, while others are rigid like a steel rod? Economists have identified four main determinants:
- Availability of Substitutes: More substitutes = more elastic. Think of cola: if Pepsi gets expensive, you buy Coke.
- Necessity vs. Luxury: Luxuries (vacation cruises) are elastic; necessities (electricity) are inelastic.
- Share of Income: Big-ticket items (cars, fridges) are more elastic than cheap goods (toothpicks).
- Time Horizon: Over months, people find alternatives, so demand becomes more elastic.
Example: In the short run, a spike in gasoline prices doesn’t reduce driving much (inelastic). But over a few years, families buy hybrid cars, move closer to work, or use trains — demand turns elastic.
🥤 The Vending Machine Experiment: Elasticity in the School Cafeteria
Imagine a middle school vending machine that sells sports drinks. The manager wants to raise revenue for new basketballs. If demand is elastic, a price increase will backfire — total revenue goes down. Let’s test this with two scenarios.
Scenario A (Inelastic): Price rises from $1.00 to $1.20 (+20%). Quantity falls only 10% (PED = 0.5). Revenue used to be $1.00 × 100 = $100. New revenue: $1.20 × 90 = $108. Revenue rises.
Scenario B (Elastic – our topic!): Same price hike (+20%). But students are loyal to a rival brand now. Quantity plunges 40% (PED = 2). Old revenue: $1.00 × 100 = $100. New revenue: $1.20 × 60 = $72. Ouch! The vending machine earns less. That’s the power of elastic demand.
✈️ From Jets to Movie Theaters: Elastic Demand at Work
Airlines know that demand for leisure travel is highly elastic. If a round-trip ticket to Orlando jumps from $250 to $350, families postpone vacation. That’s why airlines offer last-minute discounts — they want to fill seats even at low prices. Similarly, movie theaters charge less for matinees; when price drops, quantity demanded expands enormously because people love a bargain.
Even agriculture can show elastic demand. If a frost destroys half the orange crop, prices soar. But if demand is elastic, the price rise causes a huge drop in quantity bought, and orange farmers actually lose revenue. Strange but true!
❓ Three Questions Students Always Ask About Elastic Demand
Water from the tap is usually inelastic — you pay the bill no matter what. But branded bottled water is elastic. If the price of a fancy brand doubles, you’ll grab the store brand. Elasticity depends on the market definition.
Absolutely. Think of streaming services. In 2010, Netflix had few rivals, so demand was inelastic. Today, with Disney+, Hulu, and HBO Max, a price hike sends subscribers running. Substitutes make demand elastic.
Yes — think of wheat sold by a single farmer. If that farmer tries to charge one cent more than the market price, buyers go to the next farmer. The farmer faces a horizontal demand curve. It’s rare in real life but common in perfect competition theory.
📌 Elasticity Compass: What We Learned
📓 Footnote: Terminology & Abbreviations
[1] PED: Price Elasticity of Demand. A numerical measure of how much quantity demanded responds to a change in price.
[2] Total Revenue Test: A method to determine elasticity by observing the change in total revenue (price × quantity) when price changes.
[3] Substitutes: Goods that can replace each other (butter and margarine). More substitutes → more elastic demand.
[4] Unit Elastic: When PED = 1; price change causes proportional quantity change, leaving total revenue unchanged.