What is Elastic Demand?
Elastic demand is an economic concept in which the demand for the product is highly sensitive and inversely proportional to the price of the product. For example, when the price of a particular good falls, consumers tend to buy at the higher quantity and vice versa. This means the demand for that particular good is price sensitive in nature.
There are two types of elastic demand.
- Inelastic Demand: When the change of a quantity is less than the change in price.
- Unit Elastic Demand: When the percentage change in quantity is equivalent or the percentage change in price.
Elastic Demand Formula
The formula of Elastic demand is:
Examples of Elastic Demand
Below are the Examples of elastic of demand:
One of the examples of elastic demand is housing. There are many types of house available for people such as apartments, paint house, villas, condo, etc. The demand and price of each category are different from each other. The demand of paint house, villas tend to get high when the economy is good, whereas, during an economic recession, the demand of this segment diminishes, as the income of wealthy businessmen (primary customers of the segment) also diminishes and they tend to post pond their planning of buying a house.
Similarly, prices of apartments tend to fluctuate during the recession as lower-income people tend to select the rental option other than buying apartments and vice versa. During the economic boom, the price of apartments shoots up due to higher demand from the lower-income group.
The demand for food is universal and consumption is high during the recession and as well as in boom. However, the demand for different food item tends to adjust accordingly. For example, during the economic boom, the demand for high margin goods such as dinner buffet or other lavish foods gets higher because of the higher expense done by the lower-income people. Firms offering high-end food items tend to sell high quantity as the demand are higher for the premium category foods. However, during the recession, the overall quantity of food and food items remains the same but the demand shifts from the premium products to the basic- food items.
Food is an essential component for survival and it is not possible to omit. Thus when the income gets slashed, the choice of food also changes. Thus, food and food items are very much elastic in nature. Again, substitute’s product gets a change in demand during the variation in its prices.
However, there are a few exceptions of elastic demand. For example, the demand for luxurious goods does not depend upon the purchasing power of the consumers. Like buyers of diamonds are very few, do the customers are ultra-rich people and change in economic conditions does not have an impact on their income and expenditure levels. They tend to buy diamonds depending upon their mood. This type of phenomenon is known as ‘Snob effect’.
Advantages of Elastic Demand
- Elastic demand helps to retain the price of the goods. If the demand is sensitive with the price, buyers would purchase its substitutes rather buying the primary product. Thus, it helps to maintain the price of the commodity.
- Availability of different substitutes helps to retain demand for all the varieties of goods.
- As per the law of demand, the price has a correlation with the quantity demanded. A slight increase in price would aid a slight decrease in the demand for the good. A further increase would result in a moderate fall in demand. However, a drastic increase or fall in price would inversely effect on the quantity of the good.
- Elastic demand justifies the demand-supply equilibrium in the economy.
Disadvantages of Elastic Demand
- Price increase of different goods results in a decrease in consumption. Thus, there would be a negative effect from the business point of view which leads to slash in overall income levels of the parties associated with the business. The labor or the staffs related to the business would receive lower wages if the demand continues to shift downward.
- Demand for low pricing products gets higher. However, the margin remains low for the producer followed by the wage levels of the workers associated with the manufacturing of the goods and services. The only positive effect is the increment of the volume of the goods.
- Higher elasticity in demand due to the price changes lead to price fluctuation and the stability along with other economic factors erodes within the economy.
- During recession demand for basic commodities tend to be at high, for example, a consumer who uses premium clothing would choose basic clothing during hard times. Thus, demand elasticity is inversely proportionate with the price.
- For most of the goods and services, there is an inverse correlation of demand with the price. But there are few luxury items which do not maintain the theory. Products like diamonds; some antique items always have its demand. In a few cases, the higher the price of the product leads to an increase in its demand.
- Commodities like salt, match-box does not follow the theory of ‘elastic demand’ as the prices of these goods are negligible compared to the income of the consumer. Thus an increase and decrease in the prices of these commodities do not change the demand for these items. Thus the theory of ‘Elastic Demand’ is not justified in case of the above items.
Elastic demand is an old phenomenon and is very much relevant in modern days. Depending upon the consumer needs, many business houses alter their strategy of doing business. In a recession, the production of luxury items gets slashed and basic commodities are taken produced more. Elastic demand helps to identify the opportunities and threats for individual and business firms.
This has been a guide to What is Elastic demand and its Definition. Here we discuss the types of elastic demand and formula along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –