What this lesson teaches
I can calculate PED, say what the value means, and draw demand curves with different elasticities.
Syllabus K343, 2.6.2. Calculation of PED: calculation of PED using the formula; interpretation of the significance of the PED value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic; drawing and interpretation of demand curve diagrams to show different PED
Make a guess
A person with diabetes needs the same dose of insulin whatever it costs. What does the demand curve for that dose look like?
- A gentle downward slope, like most goods.
- A horizontal line, because the patient will pay any price.
- A vertical line, because quantity does not change with price.
Show the answer
A vertical line, because quantity does not change with price.
Demand is perfectly inelastic, with a PED of 0. If the price rises, the patient still buys the same amount and simply pays more.
Perfectly inelastic demand (PED = 0) is a vertical line. Perfectly elastic demand (PED infinite) is a horizontal line.
Exam questions sometimes ask you to draw the two extreme cases of demand. They are the limits of the steep and flat curves you have already drawn.
Perfectly inelastic demand has a PED of 0. Buyers want the same quantity whatever the price, so the demand curve is a vertical line at that quantity. If price rises, quantity demanded does not fall at all. Buyers simply pay more for the same amount. Insulin for a person with diabetes is close to this: the patient needs the same dose whatever it costs.
Perfectly elastic demand has an infinite PED. Buyers will buy any amount at one price, but none at all if the price rises even slightly, because they can get a perfect substitute at the old price. The demand curve is a horizontal line at that price. Think of one stall in a food centre selling the same brand of bottled water as ten other stalls.
Unitary demand (PED = 1) is not a straight line. It is a curve that is steep at high prices and flat at low prices, so that every percentage change in price brings the same percentage change in quantity and total spending stays the same. Real goods sit between the extremes; the steeper a demand curve, the closer it is to perfectly inelastic.
- Perfectly inelastic demand
- PED = 0. Vertical demand curve: quantity demanded does not change when price changes.
- Perfectly elastic demand
- PED infinite. Horizontal demand curve: any rise in price makes quantity demanded fall to zero.
- Unitary demand
- PED = 1 everywhere. A curve, not a straight line; total spending stays the same as price changes.
Worked example: One supply increase, two extreme demand curves
Suppose a good harvest increases the supply of a crop, so the supply curve shifts right from S0 to S1. Compare what happens when demand is perfectly inelastic and when it is perfectly elastic.
- Start at E0: price P0, quantity Q0. Both extreme demand curves pass through E0.
- Perfectly inelastic demand (vertical): buyers will not buy more, so the extra supply only pushes the price down, from P0 to P1 at point A. Quantity stays at Q0.
- Perfectly elastic demand (horizontal): buyers take any amount at P0, so the price does not fall. Quantity rises from Q0 to Q1 at point B.
- Lesson for exam answers: the more inelastic demand is, the more a supply shift changes price rather than quantity.
Watch out for this
Perfectly elastic demand means quantity demanded does not change when the price changes.
That describes perfectly inelastic demand (PED = 0, a vertical line). Perfectly elastic demand is the opposite: a horizontal line, where any rise in price makes quantity demanded fall to zero.
Check your understanding
The demand curve for a good is a vertical line. Supply falls, so the supply curve shifts left. What happens?
- Quantity bought falls and price stays the same
- Price rises and quantity bought stays the same
- Both price and quantity bought fall
Show the answer
Price rises and quantity bought stays the same
Right. A vertical demand curve means PED = 0, so buyers keep buying the same quantity and the whole effect falls on price.
Check your understanding
A demand curve is a horizontal line. What is its price elasticity of demand?
- Exactly one
- Infinite
- Zero
- Between zero and one
Show the answer
Infinite
Right. Any rise above that price makes quantity demanded fall to zero, so PED is infinite.