Introduction
The law of demand tells us that quantity demanded of a commodity varies inversely with its price, ceteris paribus. However, this qualitative statement does not reveal how much quantity demanded will change when price changes. For that, economists use the concept of Price Elasticity of Demand, and within this concept, they speak of different degrees of elasticity. T.R. Jain and V.K. Ohri, in their treatment of microeconomics for B.Com Semester I (Panjab University), lay particular emphasis on these degrees, because they form the basis for interpreting diagrams, numerical problems, and policy discussions relating to demand.
In this answer, the meaning of price elasticity of demand is first recalled briefly, and then the main degrees of price elasticity of demand are explained in detail, with numerical ranges, conceptual interpretation, simple examples, revenue implications and comparative tabulation.
Meaning of Price Elasticity of Demand
Price Elasticity of Demand may be defined as the degree of responsiveness of quantity demanded of a commodity to a change in its own price, other factors remaining constant. Symbolically:
Ep = (Percentage change in Quantity Demanded) ÷ (Percentage change in Price)
If a small change in price leads to a relatively large change in quantity demanded, demand is said to be highly elastic. If even a substantial change in price produces only a small change in quantity demanded, demand is described as inelastic. On the basis of this responsiveness, different degrees of elasticity are distinguished.
Diagrammatic Overview of Degrees of Elasticity
The different degrees of price elasticity of demand are usually presented with reference to the shapes and slopes of demand curves. In the figure below, the main cases as discussed in standard texts are indicated.
Main Degrees of Price Elasticity of Demand
On the basis of numerical value of Ep and the nature of the demand curve, the following degrees are usually distinguished in undergraduate microeconomics as per TR Jain & V.K. Ohri:
- Perfectly Elastic Demand (E = ∞)
- Perfectly Inelastic Demand (E = 0)
- Relatively Elastic Demand (E > 1)
- Relatively Inelastic Demand (E < 1)
- Unitary Elastic Demand (E = 1)
1. Perfectly Elastic Demand (Ep = ∞)
Demand is said to be perfectly elastic when even the smallest possible rise in price reduces the quantity demanded to zero, and the tiniest fall in price leads to an indefinitely large expansion in quantity demanded. In this case, elasticity is infinite.
Graphically, the demand curve is drawn as a horizontal straight line parallel to the X-axis. At a given price, consumers are ready to buy any amount of the commodity, but if price rises even slightly above this level, they refuse to buy at all.
Example: Highly competitive markets for a perfectly homogeneous commodity with many sellers and buyers, where each seller is a price-taker, are sometimes approximated as having perfectly elastic demand for the individual firm; any attempt to charge a higher price would reduce the firm’s sales to zero.
Perfectly elastic demand is largely a theoretical limiting case used to illustrate the upper extreme of elasticity. In real markets, demand may be highly elastic but rarely absolutely infinite.
2. Perfectly Inelastic Demand (Ep = 0)
Demand is perfectly inelastic when quantity demanded remains completely unchanged irrespective of any change in price. Consumers are compelled to buy a fixed quantity regardless of how high or how low the price may be. In this case, elasticity is zero.
The demand curve in this situation is a vertical straight line parallel to the Y-axis. Whatever the price, the quantity demanded is fixed and does not respond.
Example: In extreme theoretical cases, life-saving medicines in the absence of any substitute may be assumed to have perfectly inelastic demand in the very short run. Some amount must be purchased to survive, however high the price may be.
Like the previous case, perfectly inelastic demand is a limiting case used for analytical clarity. In reality, some responsiveness almost always exists over a sufficiently long time horizon.
3. Relatively Elastic Demand (Ep > 1)
Demand is said to be relatively elastic when the percentage (or proportionate) change in quantity demanded is greater than the percentage change in price. Thus, a small fall in price leads to a more than proportionate increase in quantity demanded; conversely, a small rise in price results in a more than proportionate fall in quantity demanded.
If |ΔQ/Q| > |ΔP/P| ⇒ |Ep| > 1 (Relatively elastic)
The demand curve in this case is relatively flatter, reflecting strong responsiveness. Consumers are sensitive to price because either close substitutes are available or the good occupies a large share in the consumer’s budget.
Example: Branded goods with plenty of close substitutes (e.g., a particular cold drink in a market with many similar brands) often exhibit relatively elastic demand; a small increase in price is likely to divert consumers to other brands.
From the point of view of revenue, when demand is elastic, a fall in price tends to increase total revenue, while a rise in price tends to reduce total revenue.
4. Relatively Inelastic Demand (Ep < 1)
Demand is described as relatively inelastic when the percentage change in quantity demanded is less than the percentage change in price. In other words, even a significant change in price induces only a modest change in quantity demanded.
If |ΔQ/Q| < |ΔP/P| ⇒ |Ep| < 1 (Relatively inelastic)
The demand curve in such a case is relatively steep. Consumers are not very sensitive to price changes, either because the commodity is a necessity, has very few substitutes, or constitutes a small proportion of their total expenditure.
Example: Basic necessities such as common salt or matches typically exhibit relatively inelastic demand within normal price ranges. Even if their price rises, consumers do not significantly reduce their consumption, because quantities used are small and substitutes are limited.
When demand is inelastic, a rise in price causes total revenue to increase, while a fall in price leads to lower total revenue. This fact is important for indirect tax policy and pricing of essential goods.
5. Unitary Elastic Demand (Ep = 1)
Demand is unitary elastic when the percentage change in quantity demanded is exactly equal to the percentage change in price. Here, the proportionate responsiveness of demand matches the proportionate change in price.
|ΔQ/Q| = |ΔP/P| ⇒ |Ep| = 1 (Unitary elastic)
The demand curve representing unitary elasticity is usually drawn as a rectangular hyperbola, indicating that total expenditure (or total revenue) remains constant at all points on the curve: a fall in price is exactly offset by a proportionate increase in quantity demanded, and vice versa.
Example: If a fall in price of 20% leads to a rise in quantity demanded of 20%, the demand for that commodity in that price range is unitary elastic, since total expenditure remains unchanged.
Comparative View of Degrees of Price Elasticity
| Degree | Numerical Value of Ep | Nature of Demand Curve | Response of Q to P Change | Effect on Total Revenue (TR) when Price Falls |
|---|---|---|---|---|
| Perfectly Elastic | Ep = ∞ | Horizontal line | Infinitely large change in Q for any small change in P | TR falls to zero if price rises even slightly; rises without bound if output expands |
| Perfectly Inelastic | Ep = 0 | Vertical line | No change in Q despite change in P | TR moves exactly with price (rise in P → rise in TR; fall in P → fall in TR) |
| Relatively Elastic | |Ep| > 1 | Flatter curve | Q changes more than proportionately to P | TR increases when price falls; TR decreases when price rises |
| Relatively Inelastic | |Ep| < 1 | Steeper curve | Q changes less than proportionately to P | TR decreases when price falls; TR increases when price rises |
| Unitary Elastic | |Ep| = 1 | Rectangular hyperbola (TR constant) | Q changes in same proportion as P | TR remains unchanged when price changes |
Significance of Knowing Degrees of Elasticity
- Pricing and revenue strategy: Firms adjust prices differently depending on whether demand for their product is highly elastic, inelastic or unitary. The degree of elasticity guides them in deciding whether a price cut or a price increase will enhance total revenue.
- Taxation and public policy: Governments prefer to tax commodities whose demand is relatively inelastic so that revenue is substantial while quantity and welfare distortions are limited.
- Substitute and complement analysis: Degrees of elasticity help evaluate the closeness of substitutes and the strength of complementarity, which is vital for competition policy.
- Welfare and incidence: The incidence and burden of taxes, subsidies and price controls depend on the degree of elasticity of demand vis-à-vis supply.
Conclusion
To summarise, the concept of price elasticity of demand becomes meaningful and operational only when its various degrees are clearly distinguished and understood. The classification into perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic and unitary elastic demand allows economists, firms and policymakers to interpret market behaviour in a systematic way. A well-organised examination answer presenting definitions, diagrams, numerical ranges, examples and revenue implications of each degree fully satisfies the expectations of Panjab University examiners and is entirely consistent with the analytical treatment in standard texts such as T.R. Jain and V.K. Ohri.