Price elasticity of demand (PED) can vary greatly depending on the good or service. Understanding the ranges of elasticity helps explain how consumers respond to price changes.
What is a range of elasticity?
Price elasticity of demand is a measure used in economics to show how the quantity demanded of a good responds to changes in its price. The value of PED tells us how sensitive consumers are to price changes. Based on this value, economists classify demand into three major ranges:
Elastic demand: PED is greater than 1
Inelastic demand: PED is less than 1
Unit elastic demand: PED is equal to 1
Each of these ranges indicates a different level of consumer responsiveness. These distinctions are important because they affect pricing strategies, business decisions, and predictions about how a market will respond to changes in price.
Elastic demand (PED > 1)
Elastic demand means that the percentage change in quantity demanded is greater than the percentage change in price. This means that consumers are very responsive to changes in price. Even a small increase in price can cause a large drop in quantity demanded, and a small price cut can cause a large increase in purchases.
Characteristics of elastic demand
PED > 1
A small percentage change in price causes a large percentage change in quantity demanded
Consumers are highly sensitive to price changes
Demand curves for elastic goods tend to be relatively flat
These goods usually have many substitutes, are luxuries, or make up a large portion of income
Examples of elastic goods
Movie theater tickets: If ticket prices rise, many people may choose to watch movies at home instead.
Airfare for leisure travel: A higher ticket price may discourage travel plans, especially for non-essential trips.
High-end fashion: Designer clothing, handbags, or shoes are often very responsive to price. A sale may lead to a large increase in demand.
These examples show that when consumers have options or when a purchase is not essential, they tend to be more responsive to price changes.
Graphing elastic demand
In a demand curve graph, elastic demand is represented by a flatter curve. This visual shows that small price changes (along the vertical axis) result in larger changes in quantity demanded (along the horizontal axis).
For example, suppose the price of a product decreases by 10 percent and quantity demanded increases by 25 percent. The PED would be:
PED = percentage change in quantity demanded / percentage change in price
PED = 25% / 10% = 2.5
Since the result is greater than 1, the demand is considered elastic.
Inelastic demand (PED < 1)
Inelastic demand means that the percentage change in quantity demanded is smaller than the percentage change in price. Consumers are not very responsive to changes in price in this range. Even when prices rise significantly, people continue buying almost the same quantity.
Characteristics of inelastic demand
PED < 1
A large percentage change in price leads to a small percentage change in quantity demanded
Consumers are not very responsive to price changes
Demand curves for inelastic goods tend to be steeper
These goods are often necessities, have few or no substitutes, or take up a small portion of income
Examples of inelastic goods
Toothpaste: If the price goes up slightly, most people will still buy it because it’s a daily essential.
Electricity: Households still need it for lighting, heating, and appliances even if rates increase.
Gasoline: While consumers may cut back slightly or carpool, demand for gas is generally stable due to the need for transportation.
In each of these cases, demand does not significantly change when prices do, because the product is necessary for everyday life and often has limited alternatives.
Graphing inelastic demand
On a graph, inelastic demand is shown with a steep demand curve. This indicates that large price changes (up or down) cause small changes in quantity demanded.
For example, suppose the price of a medication increases by 20 percent and the quantity demanded falls by 5 percent. The PED is:
PED = 5% / 20% = 0.25
Since the result is less than 1, this shows that demand is inelastic.
Unit elastic demand (PED = 1)
Unit elastic demand means that the percentage change in quantity demanded equals the percentage change in price. In this situation, the change in quantity is exactly proportional to the change in price.
Characteristics of unit elastic demand
PED = 1
A 1 percent change in price causes a 1 percent change in quantity demanded
Total revenue remains unchanged when price changes
Unit elasticity represents a middle ground between elastic and inelastic demand
This point is often used as a benchmark in elasticity analysis
Examples of unit elastic demand
Unit elastic demand is relatively uncommon in real-world goods, but it can be observed in certain price ranges on a linear demand curve. It may also occur in highly competitive markets, where businesses set prices carefully to avoid losing revenue.
For example, suppose a price increase of 10 percent causes quantity demanded to decrease by 10 percent. The PED is:
PED = 10% / 10% = 1
In this case, since the change in price and quantity are equal in percentage terms, the demand is unit elastic.
Graphing unit elastic demand
A unit elastic demand curve is often drawn as a curved shape, not a straight line, where total revenue stays the same along the curve. On a linear demand curve, unit elasticity exists at the midpoint. This is where the percentage change in price and quantity are equal and offset each other.
Elasticity along a linear demand curve
It’s important to understand that elasticity is not constant along a straight-line (linear) demand curve. Even though the slope of the curve stays the same, elasticity changes at different points on the curve.
This variation happens because elasticity depends on percentage changes, not just absolute changes. For instance, a 10 down to 10), a small decrease in price may cause a large percentage increase in quantity demanded, showing elastic behavior. At the low end ($1), a price cut may not increase quantity by much, showing inelastic behavior.
Visualizing elasticity ranges on graphs
Graphs are essential for understanding how the different ranges of elasticity look and behave. When comparing elastic, inelastic, and unit elastic demand curves, consider the following:
Elastic demand curves appear flatter, meaning small price changes cause large changes in quantity demanded.
Inelastic demand curves are steeper, indicating that quantity does not change much with price.
Unit elastic demand curves show a shape where total revenue remains the same at different points on the curve. This is often illustrated with a rectangular hyperbola shape.
These curves help students visually understand the degree of responsiveness and how it affects pricing decisions, revenue changes, and consumer behavior.
Real-world importance of elasticity ranges
For businesses
Understanding the range of elasticity helps firms decide how to price their products. If a product is elastic, increasing the price may reduce total revenue. If the product is inelastic, firms may be able to raise prices without losing many customers, increasing total revenue.
For example:
A business selling a luxury handbag (elastic demand) may focus on competitive pricing to boost sales.
A company providing electricity (inelastic demand) can raise rates slightly without a big drop in usage, possibly increasing revenue.
For consumers
Elasticity also explains consumer behavior. If a good becomes more expensive, consumers will substitute it only if it has a high PED. For goods with low PED, consumers continue buying even if prices increase, which affects budgeting and lifestyle choices.
For government policy
Governments consider elasticity when creating tax policies. A tax on an inelastic good (like cigarettes or gasoline) will raise more revenue because demand won’t drop significantly. In contrast, taxing elastic goods can lead to large drops in consumption and lower-than-expected tax revenue.
Understanding the ranges of elasticity gives students a foundational tool for analyzing how prices influence consumer decisions, how businesses adjust strategies, and how governments plan fiscal policy.
FAQ
Yes, a product’s demand can shift between elastic and inelastic depending on the price level. This happens because elasticity depends on percentage changes, not just absolute changes. On a linear demand curve, the upper segment (high price, low quantity) typically shows elastic demand—consumers are more responsive since a price change represents a large portion of their budget. In contrast, on the lower segment (low price, high quantity), demand becomes inelastic—a similar price change now represents a smaller portion of the budget, and consumers are less responsive. For example, a $5 change in the price of a $100 item is more significant than the same $5 change in a $10 item. This concept emphasizes that elasticity is not a fixed characteristic of a good but can vary along the demand curve depending on current price and quantity combinations. Businesses often analyze this when setting or adjusting prices.
The range of elasticity has a direct impact on the shape and slope of the total revenue curve, which shows how total revenue (price × quantity) changes with price. When demand is elastic (PED > 1), decreasing price increases total revenue because the percentage gain in quantity demanded outweighs the percentage loss in price. On a graph, this is seen as an upward-sloping section of the total revenue curve as price falls. When demand is inelastic (PED < 1), decreasing price reduces total revenue since the quantity increase is too small to offset the lower price—this appears as a downward-sloping section. When demand is unit elastic (PED = 1), total revenue is at its maximum point and does not change with small price movements. This peak divides the elastic and inelastic regions. Understanding these relationships is crucial for pricing strategies that aim to maximize revenue, especially in markets with predictable consumer behavior.
Although essential goods are typically inelastic, they are not always perfectly inelastic because even necessities have limits to how much people are willing or able to pay. Perfectly inelastic demand (PED = 0) means quantity demanded remains constant regardless of price changes, but this is rare. In reality, even essential goods like water, food, or gasoline can become price-sensitive at extreme price levels. Consumers may reduce usage, seek alternatives, or ration their consumption if prices rise sharply. For instance, during a gas price spike, people may drive less, use public transportation, or carpool—demonstrating that while demand is inelastic, it’s not completely unresponsive. Additionally, the presence of government subsidies, public alternatives, or consumer awareness campaigns can gradually make even necessary goods more elastic. Therefore, while essentials often have low elasticity, the demand is rarely perfectly inelastic in real markets because consumers can adjust behavior under financial pressure.
Luxury goods often have elastic demand, but not always. Typically, goods considered non-essential and expensive tend to be more sensitive to price changes because consumers can delay or avoid the purchase. However, brand loyalty, status symbolism, or limited availability can make certain luxury goods less elastic. For example, a limited-edition designer handbag may have inelastic demand among brand-loyal consumers who view it as a status symbol rather than a discretionary item. In this case, even a significant price increase might not reduce demand much. The market segment also matters—wealthier consumers may be less sensitive to price changes, reducing the elasticity of luxury items in that demographic. Additionally, some luxury goods are considered Veblen goods, where higher prices may actually increase demand due to their perceived prestige. So while elasticity is a useful general rule for luxury goods, actual responsiveness depends on factors like consumer psychology, income, and product exclusivity.
Digital and subscription-based products often exhibit different elasticity behavior compared to traditional physical goods due to their low marginal cost and non-tangible nature. For instance, once a streaming platform develops its service, the cost of providing it to one more user is almost zero. As a result, companies often use elasticity analysis to experiment with pricing tiers or promotional offers. These products may have highly elastic demand when many substitutes exist (e.g., switching from Netflix to Hulu), or if free or freemium versions are available. However, digital services can also exhibit less elastic demand due to high switching costs, bundling, or user lock-in. For example, customers using cloud storage might be less responsive to price changes if they’ve already uploaded and organized years of data. Therefore, the elasticity of demand for digital products is influenced by factors such as brand ecosystem, contract terms, and consumer familiarity—often making it more complex than with typical goods.
Practice Questions
A 10% increase in the price of a product leads to a 20% decrease in the quantity demanded. Using the concept of price elasticity of demand, identify the range of elasticity this situation represents. Explain what this implies about consumer responsiveness and describe one real-world example of a good that might fit this category.
This situation represents elastic demand, as the price elasticity of demand (PED) is 2.0 (20% ÷ 10%), which is greater than 1. This means that consumers are highly responsive to price changes. A small increase in price results in a proportionally larger decrease in quantity demanded. This type of demand is common for non-essential or luxury goods where substitutes are available. For example, high-end electronics such as premium headphones or gaming consoles often show elastic demand—if prices rise, many consumers delay purchases or switch to alternative brands.
Explain how elasticity changes along a straight-line (linear) demand curve. Use the concepts of elastic, inelastic, and unit elastic demand to describe the different regions of the curve.
On a linear demand curve, elasticity is not constant and changes at different points. At the upper portion of the curve where price is high and quantity is low, demand is elastic—a price change leads to a large change in quantity demanded. At the midpoint, demand is unit elastic—percentage changes in price and quantity are equal. At the lower portion, where price is low and quantity is high, demand is inelastic—price changes result in small changes in quantity demanded. This variation occurs even though the slope of the demand curve remains constant throughout.
