🤑ap microeconomics review

key term - Perfectly Elastic Demand

Definition

Perfectly elastic demand refers to a situation where the quantity demanded of a good or service changes infinitely with any change in price. This concept indicates that consumers are highly sensitive to price changes; even a slight increase in price will lead to the quantity demanded dropping to zero, while a decrease in price will lead to an infinite increase in quantity demanded. Perfectly elastic demand often occurs in markets with many substitutes, where consumers can easily switch to another product if the price rises.

5 Must Know Facts For Your Next Test

  1. In perfectly elastic demand, the price elasticity coefficient is equal to infinity, indicating extreme sensitivity to price changes.
  2. This type of demand is often represented graphically as a horizontal line on a price-quantity graph, meaning that any increase in price results in no sales.
  3. Perfectly elastic demand is most commonly found in perfectly competitive markets where numerous substitutes are available for consumers.
  4. An example of perfectly elastic demand can be seen in agricultural products sold at market prices; if one seller raises their price slightly, buyers will purchase from another seller instead.
  5. While perfectly elastic demand is theoretical and rare, it helps illustrate consumer behavior in response to price fluctuations in real-world scenarios.

Review Questions

  • How does perfectly elastic demand illustrate consumer sensitivity to price changes?
    • Perfectly elastic demand demonstrates consumer sensitivity by showing that even the smallest increase in price can lead to an infinite drop in quantity demanded. Consumers are willing to switch to substitutes instantly if their preferred product's price rises. This concept emphasizes that when substitutes are readily available, consumers prioritize cost over brand loyalty or product preference.
  • Discuss the conditions under which perfectly elastic demand might occur in a market.
    • Perfectly elastic demand typically occurs in perfectly competitive markets where numerous substitutes are available. In these markets, consumers have complete freedom to choose between products based solely on price. If one seller increases prices, consumers will immediately turn to other sellers offering lower prices. The existence of many substitutes and low differentiation among products leads to this type of elasticity.
  • Evaluate how perfectly elastic demand affects pricing strategies for businesses operating in competitive markets.
    • In competitive markets characterized by perfectly elastic demand, businesses must carefully consider their pricing strategies because even small increases can result in total loss of customers. Firms need to maintain competitive pricing and focus on cost management to stay profitable. Understanding that their pricing power is minimal forces businesses to find alternative ways to add value, such as improving service quality or differentiating their products, instead of relying on higher prices for revenue.