Page 51 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes
Figure 4.2: Perfectly Inelastic and Perfectly Elastic Demand Curves

Price (p) Price (p) D

D
Quantity (q) Quantity (q)
Perfectly Inelastic Demand Perfectly Elastic Demand

In cases where, the percentage change in quantity demanded of the good is equal to the percentage
change in its price, the elasticity of demand is equal to 1. (e =1). The good has unit elastic demand.
d
The demand curve for such a good is shown in Figure 4.3.

Figure 4.3: Unit Elastic Demand Curve

P
Price 1
P
2

Demand

Q Q
1 2
Quantity

Notes Factors determining elasticity of demand
Some important factors that determine the elasticity of demand are:
1. Luxury or Necessity Goods: Luxury goods tend to have an elastic demand, while
necessity goods have an inelastic demand. Purchasers can stop buying the luxury
goods when their prices rise.
2. Percentage of Income: Big items in a budget tend to have a more elastic demand than
small items. For example, consumers may be affected by a 1 per cent rise or fall in

price of a flat but are insensitive to such fluctuations in pens.
3. Substitutes: Items that can be substituted easily have a more elastic demand than
those that cannot.
4. Time: The demand for a product becomes more elastic the longer the time period
under consideration. It takes time to decide about another product before buying it
as one develops a habit of using a particular product.

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