Question 4: Briefly explain the elasticity of demand?

Bring out the

graphical representation on the 5 cases of elasticity of demand.

Elastic Demand An elastic demand is something in which the variation in quantity required as a result of a change in price is high. In inelastic demand the change in quantity required due to a change in price is small.

If the demand for a product is very ELASTIC, it will change a lot as the price changes. So, if the cost of a product falls, many people will buy it because the cost is less. If the cost increases, lots of people will choose not to purchase because the price is too high. . If the demand for a product is very INELASTIC, it will not change much even if the cost varies. Say, if something is very unattractive because it is not good or very costly to maintain, the demand will be inelastically low; whether you change the cost or not, people will not buy it. Alternatively, if there is something people actually want and there is only one place to get it they are expected to purchase it even if the price goes up if they have capacity to pay. 5 Cases of Elasticity of Demand Elasticity of demand can be observed that a change in price affects a huge change in quantity demanded. An example of products with an elastic demand is consumer durables. These are items that are purchased rarely, like an air condition, Washing Machine, Refrigerator or a vehicle, and can be delayed if price rises. Case 1 (Perfect Elastic Demand) There is case called Zero elasticity, also called as perfect inelasticity, happens when a cost change has no effect on the quantity required. Some medicines and health care services have absolutely inelastic demand.
Perfect Elastic Demand

P r i c e

Quantity

Case 2 (Perfect Inelastic Demand)

Perfect Elastic Demand

This represents a condition in which demand shows no reaction to a change in cost. Or no matter what be the cost the quantity demanded continues to be the same. It is shown by means of the graph.

P r i c e

Quantity

Case 3 (Unitary Elasticity of Demand) When the price decreases from OMR 1.50 (point A) to OMR 0.075 (point A1), total revenue equals OMR150 in both cases. This graph is represents that the price hike from OMR 1.50 to OMR 3.00 does not change the revenue, because the demand for petrol decreases to 50 gallons (50 gallons at OMR 3.00 a gallon equals OMR 150).

Case 4 Relative Elasticity In few cases for specific supplies the demand is relatively more reactive or open to the change in cost. In that case a small variation in cost brings on a major change in demand. This can be realized by the alongside graph.
P r i c e
Relative Elastic Demand

Quantity

Case 5 Relative Inelasticity In relative inelasticity the proportion of change in demand is smaller than that in cost. This represents that the demand is relatively less reactive or open to the variation in cost. This is called as an relative inelastic demand.
Relative Inelastic Demand

P r i c e

Quantity

Ref: C Burr- 1983, Harvard University