4.3 Relative Elasticity
Learning Objectives
By the end of this section, you will be able to:
- Differentiate between perfectly elastic and inelastic
- Understand the difference between elasticity on a single curve and relative elasticity
- Explain what variables influence elasticity of supply and demand
Textbook or Burger?
In Topics 4.1 and 4.2, we looked at elasticity on a single demand curve and examined how responsive consumer are to price changes at various levels of production. But what about responsiveness across firms? Across industries? We know that in certain industries, such as the textbook industry, consumers are less responsive to change than others. How is the quantity demanded for textbooks affected by an increase in price? If the textbook for a course rose from $100 to $150, what would you do? Most students will buy the book anyway, since it is a required course material. Publishers are increasingly using different strategies to ensure the market stays inelastic or unresponsive to price change, such as bundling the textbook with mandatory course access codes. Compare this situation with the price of a burger. If the price of a burger rises from $8 to $12, you may purchase lunch from a different restaurant or start packing lunch from home. The market for textbooks and burgers are very different. In this section, we will explore the relative elasticity of different markets.
Perfectly Elastic and Perfectly Inelastic
To begin the conversation about relative elasticity, it helps to first look at the extremes.
Perfectly Elastic
Imagine a product where if the price increased, even slightly, you wouldn’t buy any it anymore. Sound familiar? That’s because we introduced this concept in Topic 3, as one of the assumptions of a perfectly competitive market. One of the examples we used was identical hot dog stands, side by side, where the only difference was price. If quality is the same, the rational consumer will always purchase the hot dog that is a lower price. From the perspective of the stand, they know that if they increase price even slightly, they will sell 0 units. This means that ED = ∞.
Using point-slope at any point in Figure 4.3a, we can confirm this.
[latex]\frac{\Delta Q}{\Delta P}\cdot \frac{P}{Q}=?[/latex]
We know that [latex]\frac{\Delta Q}{\Delta P}[/latex] is equal to the inverse of the slope. In the demand curve in Figure 4.3a, when the ΔP>0 then ΔQ is equal to ∞. This means that [latex]\frac{\Delta Q}{\Delta P}[/latex] = ∞.
Perfectly Inelastic
At the other end of the spectrum, consider a market where the firm can continue to increase prices with no change in quantity. If you were poisoned and had to buy the antidote, would you be responsive to price change? Probably not. This is an example of a situation where demand is nearly perfectly inelastic. If you increase the price, quantity demanded does not change. This means that ED = 0.
We can confirm this by using point-slope at any point in Figure 4.4a.
In the demand curve in