Perfectly elastic

Definition

Perfectly elastic refers to a situation in economics where the quantity demanded or supplied changes infinitely in response to any change in price. This concept highlights the extreme responsiveness of consumers or producers to price changes, resulting in a horizontal demand or supply curve. In this scenario, even the slightest increase in price leads to a complete drop in quantity demanded, while a decrease in price would cause demand to soar, illustrating an idealized form of elasticity.

5 Must Know Facts For Your Next Test

1. Perfectly elastic demand is typically seen in perfectly competitive markets where many substitutes are available.
2. In perfectly elastic scenarios, even a small price increase can lead to zero sales, as consumers can easily switch to alternatives.
3. The concept of perfectly elastic is more theoretical and rarely exists in real markets, but it helps illustrate extremes in consumer behavior.
4. A perfectly elastic supply curve is also horizontal, showing that suppliers will only sell at one price and no other.
5. Goods with perfectly elastic demand are often those that are non-essential or have many substitutes, like certain luxury items or specific brands.

Review Questions

• How does perfectly elastic demand influence pricing strategies for businesses operating in competitive markets?
  • In markets characterized by perfectly elastic demand, businesses must be acutely aware of their pricing strategies. If a company raises its prices even slightly, consumers will completely abandon their product for cheaper alternatives. This forces businesses to keep prices low and competitive to maintain their market share and prevent losing customers to rivals.
• Discuss the implications of perfectly elastic supply on market equilibrium and producer behavior.
  • Perfectly elastic supply means that producers are willing to sell any quantity of a good at a specific price but will not sell at higher prices. This creates a unique situation in which market equilibrium is highly sensitive to any price fluctuations. If market prices rise above this level, producers will not supply any quantity, while if prices fall, they will supply any amount demanded at that lower price. Such conditions encourage producers to keep costs down and respond quickly to market changes.
• Evaluate the practicality of perfectly elastic demand and supply in real-world markets and how they relate to consumer behavior theories.
  • While perfectly elastic demand and supply serve as useful theoretical constructs to understand extreme cases of market behavior, they rarely occur in reality. Most goods have some degree of inelasticity due to brand loyalty, limited substitutes, or necessity. However, understanding these concepts helps economists analyze consumer behavior theories related to substitution effects and elasticity trends, highlighting how sensitive markets can be under ideal conditions. This analysis can inform business strategies and economic policies designed to enhance market efficiency.

Related terms

Elasticity: Elasticity measures how much the quantity demanded or supplied of a good responds to changes in price or other factors, indicating the sensitivity of consumers and producers.

Demand Curve: A graphical representation that shows the relationship between the price of a good and the quantity demanded at various prices.

Perfectly Inelastic: A situation where the quantity demanded or supplied does not change at all with changes in price, represented by a vertical demand or supply curve.