Light

Perfectly Elastic Demand

Definition

Perfectly elastic demand refers to a situation where the quantity demanded of a good or service changes infinitely in response to any change in price. In other words, consumers are extremely sensitive to price changes and will not buy any quantity if the price increases even slightly.

Analogy

Imagine you're at a store selling ice cream cones on a hot summer day. If you suddenly increase the price of an ice cream cone by just $0.01, all the customers immediately decide not to buy any ice cream because they can easily find cheaper alternatives elsewhere.

Related terms

Substitutes: Substitutes are goods that can be used as alternatives to each other. For example, if the price of Coke increases significantly, people may switch to Pepsi as a substitute.

Total Revenue Test: The total revenue test is a method used to determine whether demand for a good is elastic or inelastic by examining how changes in price affect total revenue (price multiplied by quantity sold). If an increase in price leads to a decrease in total revenue, demand is elastic; if it leads to an increase in total revenue, demand is inelastic.

Price Elasticity of Demand: Price elasticity of demand measures how responsive the quantity demanded of a good or service is to changes in its own price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.