💵principles of macroeconomics review

key term - Perfectly Elastic Demand

Definition

Perfectly elastic demand refers to a situation where the quantity demanded of a good or service is infinitely responsive to even the smallest change in price. In this scenario, consumers are willing to buy any quantity at the prevailing market price, but will not buy any quantity if the price changes even slightly.

5 Must Know Facts For Your Next Test

  1. Perfectly elastic demand is represented by a horizontal demand curve, indicating that quantity demanded changes infinitely in response to even the smallest price change.
  2. Goods and services with perfect elastic demand have no close substitutes, and consumers are highly sensitive to even minor price fluctuations.
  3. Examples of goods with perfectly elastic demand include basic commodities like salt, sugar, and other essential goods with no alternative options.
  4. The concept of perfectly elastic demand is an extreme case used in economic models, as real-world markets rarely exhibit such perfect price sensitivity.
  5. Understanding the degree of price elasticity is crucial for businesses to set optimal prices and maximize revenue.

Review Questions

  • Explain how the concept of perfectly elastic demand relates to the shape of the demand curve.
    • In the case of perfectly elastic demand, the demand curve is represented by a horizontal line, indicating that the quantity demanded will change infinitely in response to even the slightest change in price. This means that consumers are willing to buy any quantity at the prevailing market price, but will not buy any quantity if the price changes even slightly. The horizontal demand curve reflects the high price sensitivity of consumers in a perfectly elastic market.
  • Describe the factors that contribute to a good or service having perfectly elastic demand.
    • Goods and services with perfectly elastic demand typically have no close substitutes, meaning consumers have no alternative options. Additionally, these goods are often considered essential or basic necessities, where consumers are highly sensitive to even minor price fluctuations. Examples include basic commodities like salt, sugar, or other essential goods with no alternative options. The lack of substitutes and the high price sensitivity of consumers are the key factors that contribute to a good or service having perfectly elastic demand.
  • Analyze the implications of perfectly elastic demand for businesses and their pricing strategies.
    • The concept of perfectly elastic demand has significant implications for businesses and their pricing strategies. In a market with perfectly elastic demand, businesses have limited pricing power, as any increase in price will result in a complete loss of sales. Conversely, businesses cannot raise prices without losing all their customers. This means that businesses must carefully consider the degree of price elasticity in their market and adjust their pricing strategies accordingly. Understanding the concept of perfectly elastic demand is crucial for businesses to set optimal prices, maximize revenue, and remain competitive in their respective markets.