Elastic Demand vs Perfectly Elastic
Elastic Demand and Perfectly Elastic are two Elasticity concepts in AP Economics that students often mix up. Elastic demand is when the quantity demanded changes more than the price changes. Perfectly elastic demand is when any change in price leads to an infinite change in quantity demanded. Here is how they compare side by side.
In elastic demand, the percentage change in quantity demanded is greater than the percentage change in price. This means that consumers are very sensitive to price changes. Goods with many substitutes, such as luxury goods, often have elastic demand.
In perfectly elastic demand, consumers are infinitely sensitive to price changes. This means that even the slightest increase in price will cause the quantity demanded to drop to zero. Perfectly elastic demand is a theoretical concept that is not often observed in real markets.
Elastic vs Perfectly Elastic Demand: Very Responsive and Infinitely Responsive
| Elastic Demand | Perfectly Elastic Demand | |
|---|---|---|
| Elasticity coefficient, absolute value | Greater than 1 but finite | Infinite |
| Shape of the curve | Flatter than unit elastic, still sloping down | Horizontal at one price |
| What a small price rise does to sales | Quantity falls by a larger percentage than the price rose | Quantity demanded falls to zero |
| Marginal revenue | Positive but below the price | Equal to the price at every quantity |
| Effect of a price cut on total revenue | Revenue rises | No reason to cut, since any quantity already sells at the going price |
| Who typically faces it | Sellers of goods with close substitutes, such as one brand of cereal | A single price taking firm in perfect competition |
| Pricing power held by the seller | Limited, but a price can be chosen | None, the market price is taken as given |
One curve loses customers quickly; the other loses all of them at once
Take one brand of cereal, priced at an illustrative $5, selling 40 boxes a day. Cut the price to $4 and sales rise to 60. Using the midpoint method, quantity changes by 20 over the average of 50, which is 40 percent, and price changes by 1 over the average of 4.50, which is 22.22 percent. Divide and the coefficient is 1.8 in absolute value, so demand is elastic. Revenue confirms it: 5 times 40 is $200 before, and 4 times 60 is $240 after. The seller still chose a price, and buyers still stayed at the higher one. Now stand a single wheat farmer in a market clearing at $6 a bushel. He can sell 90 bushels for $540 or 120 bushels for $720, and every extra bushel adds exactly $6, because the price never has to fall to move it. Post $6.10 and he sells nothing, since every buyer has hundreds of identical sellers to call instead. There is no gentle drop to measure, so the coefficient is not a large number, it is infinite. Elastic demand punishes a price rise. Perfectly elastic demand forbids one.
Perfectly elastic demand describes one seller's slice, never the whole market
The most common error is deciding that wheat itself has perfectly elastic demand. It does not. Total market demand for wheat slopes downward and is fairly inelastic, since bread buyers cannot easily replace it. Both statements hold at the same time because they describe different curves. Suppose the market trades 9 million bushels while our farmer supplies 90 of them, roughly 0.001 percent of the total. Withdraw his whole crop and the market price does not visibly move, so from where he stands the price looks fixed and his own demand curve looks flat. Sum every farmer's flat curve, though, and you recover the downward sloping market curve, because a change big enough to matter does move the price. Two consequences follow for exam questions. A perfectly competitive firm draws a horizontal line at the market price and treats it as both demand and marginal revenue, which is why price equals marginal revenue there. A firm facing merely elastic demand draws a downward sloping line and gets a marginal revenue curve underneath it. The structure is set out at /micro/perfect-competition, and the measure itself at /micro/elasticity.
Frequently asked questions
What is the difference between elastic and perfectly elastic demand?
Elastic demand has a price elasticity greater than 1 but finite, so a price rise reduces quantity by a larger percentage than the price rose, while perfectly elastic demand has infinite elasticity and any price rise sends quantity demanded straight to zero. Elastic demand curves slope downward; perfectly elastic curves are horizontal. Real brands face the first, and price taking firms face the second.
Which firms face a perfectly elastic demand curve?
Firms in perfect competition face perfectly elastic demand, because each sells an identical product alongside many rivals and is too small to shift the market price. Buyers switch away completely at even a fraction of a cent above the going price. A small exporter selling at a world price is treated the same way.
Can an entire market have perfectly elastic demand?
Practically never, because a market wide price rise leaves buyers with nowhere identical to go, so quantity falls without collapsing to zero. Perfectly elastic demand belongs to the individual seller, not the market. Market demand for even the most substitutable good still slopes downward.
Live Elasticity graph. Drag the curves, or open the full version.
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