09-23-2008, 10:18 PM
Let's look at three different scenarios:
1) Perfectly inelastic demand-Demand for a product stays the same regardless of price. Think of a commodity that people absolutely have to have, they literally can't live without it. Demand won't drop if the price goes up because there is no choice, people must buy the product. This is a theoretical model, not very likely in the real world; when prices get high enough alternative products/technologies become more viable.
2) Perfectly elastic demand-Consider a product that people don't absolutely need; it is a discretionary purchase. Unlike example #1, price will have a huge impact on demand; the more the price goes up, the less people will buy the product. When there is an exact relationship between demand and price (i.e., when the price doubles demand drops in half) you have perfectly elastic demand. (Again a theoretical model.)
3) Constant elastic demand-Price plays a consistent role in influencing demand, though not to the extent found in perfectly elastic demand. Here a 20% price increase might result in a 5% drop in demand. The key point is that the ratio between price increase and demand decrease would be consistent and predictable...hence the word "constant."
1) Perfectly inelastic demand-Demand for a product stays the same regardless of price. Think of a commodity that people absolutely have to have, they literally can't live without it. Demand won't drop if the price goes up because there is no choice, people must buy the product. This is a theoretical model, not very likely in the real world; when prices get high enough alternative products/technologies become more viable.
2) Perfectly elastic demand-Consider a product that people don't absolutely need; it is a discretionary purchase. Unlike example #1, price will have a huge impact on demand; the more the price goes up, the less people will buy the product. When there is an exact relationship between demand and price (i.e., when the price doubles demand drops in half) you have perfectly elastic demand. (Again a theoretical model.)
3) Constant elastic demand-Price plays a consistent role in influencing demand, though not to the extent found in perfectly elastic demand. Here a 20% price increase might result in a 5% drop in demand. The key point is that the ratio between price increase and demand decrease would be consistent and predictable...hence the word "constant."