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Economic Theory

goods such as cigarettes and potato chips are not very responsive to price
changes and thus have inelastic demand.
Unit Elastic Demand (Ep = 1). Goods with a price elasticity of
demand equal to 1 have unit elastic demand. Demand for a commodity

will be said to be unit elastic if the percentage change in quantity
demanded equals the percentage change in price. In this case, a price

increase does not affect total expenditures on the good. Economists have
found that wine has unitary elastic demand.
Perfectly Elastic Demand (Ep  ∞). Theoretically, demand may be
perfectly elastic, which means that demand is highly responsive to price

changes – the smallest increase in price causes consumers to stop
consuming the good altogether. In this case, demand curve is horizontal
straight line parallel to X-axis.

Perfectly Inelastic Demand (Ep = 0). Demand for a commodity will
be said to be perfectly inelastic, if the quantity demanded does not change
at all in response to a given change in price. The phrase “gotta have it”

describes such goods, which include insulin for diabetics. The demand
curve, in this case, is vertical straight line perpendicular to Y-axis. Two
last cases are rare in real life.

Elasticity of demand differs from commodity to commodity. The
various factors upon which elasticity depends are the following:

Table 5.3 – Determinants of Price Elasticity of Demand

Factors Results
Substitute A commodity will have elastic demand if there are good substitutes
Goods for it. This is because when price of a good rises, a consumer will
not buy the good but purchase its substitute.
Nature of All necessities like salt, rice etc. that have no substitutes/or less
Commodity substitutes will have an inelastic demand. People have to purchase
such commodities for their sustenance. Therefore, there will be
some demand despite the changes in price. Demand for luxury
goods, on the other hand, will be elastic. If prices of such
commodities rise even a little, consumers refrain to buy. At the
same time a little lowering of price of such commodities attract a
large number of consumers.
Number of The larger the number of uses to which a commodity can be put,
Uses of the higher will be its elasticity. Therefore the demand of such goods
Commodity will have elastic demand. For example, milk can be used for
various purposes such as for making curd, cake, sweets etc. When
its price goes down, demand increases but a little rise in its price
makes demand fall greatly.

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