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 Elasticity Price Elasticity of Demand: The Extreme Cases

We stated above that the price elasticity of demand falls into three general categories:

• Elastic

• Unitary Elasticity

• Inelastic

The price elasticity of demand is elastic in a given range of the demand curve if the price elasticity of demand is strictly bigger than one. Another way of thinking of the definition of elastic is that the percentage change in quantity demanded is bigger than the percentage change in price. If demand is elastic, then it will change more in response to smaller changes in price.

The extreme case of an elastic demand curve is called perfectly elastic. In this case, the elasticity of demand is infinity, meaning that even a small change in the price will cause the demand to completely disappear. Such a curve is shown below:

Unitary elasticity is when the price elasticity of demand is exactly equal to one. This means that when price changes by some percentage, the quantity demanded will change by the exact same percentage. It is possible to have a demand curve in the shape of a rectangular hyperbola for which the elasticity at every point would be equal to one.

The price elasticity of demand is called inelastic over the range of a demand curve where the price elasticity of demand is strictly less than one. Inelastic demand occurs when the percentage change in quantity demanded is less than the percentage change in the price. The extreme case of inelastic demand is called perfectly inelastic. A perfectly inelastic demand curve will show no change at all in the quantity demanded when the price changes, so the price elasticity of demand is zero. An example of a perfectly inelastic demand curve is shown below.

Even though we stated above that elasticity and slope are not the same, generally speaking, the greater the elasticity of demand, the flatter the demand curve, and the smaller the elasticity of demand, the steeper the demand curve.

With some exceptions, like the perfectly elastic and inelastic curves, all demand curves are elastic at the top of the curve and become inelastic eventually as you move down the curve (with unitary elasticity at the midpoint).

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