Types of Price Elasticity
There are five main categories of price elasticity, organized by the degree to which the quantity demanded of a good or service responds to changes in its price.
Main Categories
- Perfectly Inelastic Demand — occurs when the quantity demanded of a good or service does not change in response to a change in price, with insulin being a classic example, as diabetic patients will continue to purchase it regardless of price increases.
- Relatively Inelastic Demand — occurs when the quantity demanded of a good or service changes proportionally less than the change in price, with gasoline being an example, as people will still buy it even if prices rise, although they may drive less or carpool.
- Unitary Elastic Demand — occurs when the percentage change in quantity demanded is equal to the percentage change in price, with clothing being an example, as a 10% increase in price may lead to a 10% decrease in sales.
- Relatively Elastic Demand — occurs when the quantity demanded of a good or service changes proportionally more than the change in price, with luxury goods like designer handbags being an example, as a price increase may lead to a significant decrease in sales.
- Perfectly Elastic Demand — occurs when the quantity demanded of a good or service changes infinitely in response to a change in price, with a generic commodity like wheat being an example, as buyers can easily switch to alternative suppliers if the price increases.
Comparison Table
| Category | Price Sensitivity | Example |
|---|---|---|
| Perfectly Inelastic Demand | No change in quantity demanded | Insulin |
| Relatively Inelastic Demand | Quantity demanded changes less than price | Gasoline |
| Unitary Elastic Demand | Quantity demanded changes equal to price | Clothing |
| Relatively Elastic Demand | Quantity demanded changes more than price | Luxury goods like designer handbags |
| Perfectly Elastic Demand | Quantity demanded changes infinitely | Wheat |
How They Relate
The categories of price elasticity are not mutually exclusive, and goods or services can exhibit different degrees of elasticity depending on the situation. For example, Relatively Inelastic Demand and Relatively Elastic Demand can be seen as two ends of the same spectrum, with Unitary Elastic Demand being the midpoint. Meanwhile, Perfectly Inelastic Demand and Perfectly Elastic Demand are extreme cases that rarely occur in reality. Ricardo's comparative advantage model (1817) highlights the importance of understanding price elasticity in international trade, as countries with a comparative advantage in producing a good will be less sensitive to price changes. The Law of Demand, which states that the quantity demanded of a good or service decreases as its price increases, underlies all categories of price elasticity. Understanding these relationships is crucial for businesses and policymakers to make informed decisions about pricing, production, and trade.