Price Elasticity of Demand SAQ

Perfectly Elastic Demand

• Demand for a good is perfectly elastic when a price rise leads to a quantity demanded of zero.
• This occurs in a perfectly competitive market, where there are many sellers and buyers.
• In a perfectly competitive market, sellers have no control over the market price.
• If one seller raises their price, they will not sell any goods.

Example

• 100 fruit sellers sell bananas in a market for 30c each.
• If one seller raises their price to 35c, they will not sell any bananas, as buyers will opt for the cheaper alternatives.

Perfectly Elastic Demand

• A good has perfectly elastic demand if a price rise leads to a fall in quantity demanded to zero.
• In a perfectly competitive market, sellers face perfectly elastic demand.
• Example: 100 fruit sellers sell bananas at 30c each; if one seller raises the price to 35c, they will not sell any bananas.
• A flat demand curve is an indicator of perfectly elastic demand.

Demand Elasticity

• A good has relatively elastic demand if its percentage change in price is outweighed by the percentage change in quantity demanded.
• Example: a 1% increase in price leads to a 3.5% decrease in quantity demanded, indicating high elasticity.

Demand Curve and Price Sensitivity

• The flatter the demand curve, the more price sensitive consumers are to the item.
• This means that a small price change will lead to a larger change in quantity demanded.

Price Elasticity of Demand (PED)

• Measures the percentage change in the quantity demanded of a good/service in response to a percentage change in price
• Reflects the degree of sensitivity or responsiveness of consumer demand to a change in the price of a good/service or to a change in income

Types of Elasticity

Unitary Elastic

• Demand for a good/service is unitary elastic if the percentage change in the quantity demanded is equal to the percentage change in price
• Example: 1% rise in price would result in a 1% fall in quantity demanded

Perfectly Inelastic Demand

• Demand for a good is perfectly inelastic when there is no change in the quantity demanded despite a price change.
• Example: A patient with high blood pressure will continue to buy essential medication regardless of a price increase in all pharmacies.
• A vertical demand curve indicates perfectly inelastic demand.
• A significant price increase in essential medication will not affect the quantity demanded, remaining unchanged.

Indirect Taxes and Elasticity of Demand

• Governments often impose indirect taxes on goods with relatively inelastic demand, such as fuel and tobacco products.
• The goal of these taxes is to discourage consumption of these goods.
• Inelastic demand means that the percentage change in price is greater than the percentage change in quantity demanded.
• When the government raises taxes on these goods, the subsequent price increase leads to a smaller reduction in quantity demanded, resulting in a substantial revenue increase for the government.

Understanding perfectly elastic demand in a competitive market, where a small price increase leads to zero quantity demanded.