Demand Curves and Elasticity
Elasticity affects the slope of a product’s demand curve. A greater slope means a steeper demand curve and a less-elastic product. In the graph below, the steeper demand curve, D1, shows a change in quantity demanded of 8 products (from 60 to 68) when the price changes by one dollar (from $9 to $8). The flatter demand curve, D2, shows a change in quantity demanded of 40 products (from 60 to 100) when the price changes by $1 (from $9 to $8). Clearly, the flatter demand curve shows a much greater quantity demanded response to a price change. Therefore, it is more elastic.
For a video explanation of how elasticity and the slope of the demand curve are related, please watch:
Perfect Elasticity and Perfect Inelasticity
Perfect elasticity is when a product can only be sold at one price (as in the case of a perfectly competitive firm – see our Unit 6). If the price changes then the quantity demanded changes to zero. In the graph below, if the demand curve is D1 (perfect elasticity), buyers only buy the product at $9. They buy nothing at any other price.
Perfect inelasticity is when buyers purchase a certain quantity (60 in the graph below), regardless of the price. They buy 60 products at $1 or $2 or $100 or any other price.
Perfect elasticity and perfect inelasticity are two extremes. No product is perfectly elastic or perfectly inelastic. However, some products come close. A medicine that is the difference between life and death is close to perfectly inelastic. If their lives depend on it, buyers are willing to pay just about anything to get it.
A product that has many substitutes comes close to being perfectly elastic. A farmer, who sells grain competes with other farmers selling the same product. Grain from farmer A is nearly identical to grain from 100 or more other grain farmers. Therefore, if farmer A raises her/his price above the market price (for example, $9), then buyers will purchase zero products from farmer A (assuming the other farmers keep their price at $9). The farmer also cannot lower her/his price, because it would lower her/his profits to a level where (s) (s)he would go out of business. Thus, the farmer faces a horizontal demand curve and a market-controlled equilibrium price.
Another example of products that have close to perfect elasticity are the newspapers and magazines sold in newspaper stands in large cities. Competitors are selling these products at the exact same price due to the intense amount of competition between them.