What is meant by elastic, inelastic, and unit elastic demand?
Answer:
If the price elasticity of demand coefficient is greater than 1, then demand for a good or service is said to be price elastic. For example, if a 20 percent reduction in the price of, say, mechanical engineering parts produced an increase in quantity demanded of 60 percent, then this good is price elastic (60% over 20% = 3). Other examples of price elastic goods are automobiles, furniture, and metals.
If the elasticity of demand coefficient is between 0.1 and 1.0, then demand for a good or service is said to be price inelastic. For example, if a 20 percent reduction in the price of a book creates only a 7 percent increase in the quantity demanded, then this good is price inelastic (7% over 20% = 0.34). Other goods that are price inelastic are natural gas, electricity, and water.
If the elasticity of demand coefficient is equal to 1.0, then demand for a good or service is considered to be unit elastic. A reduction in the price of a good causes an equally proportionate increase in the quantity demanded. A reduction in the price of a baseball, for example, from $5 to $4.50 creates an increase in monthly sales from 5000 to 5250. The elasticity of demand is unit elastic (5% over 5% = 1.0).
