Infinite Elasticity

Definition

Infinite elasticity refers to a situation where the quantity demanded of a good or service is perfectly responsive to even the smallest change in price. In this case, the demand curve is perfectly horizontal, indicating that consumers will buy any quantity at the prevailing market price.

5 Must Know Facts For Your Next Test

1. Infinite elasticity is one of the two polar cases of elasticity, the other being perfectly inelastic demand.
2. With infinite elasticity, consumers will buy any quantity of the good at the prevailing market price, as they are highly responsive to even the smallest price changes.
3. Infinite elasticity is often used as a theoretical concept to simplify economic models, but it is rarely observed in real-world markets.
4. Goods and services with close substitutes are more likely to exhibit infinite elasticity, as consumers can easily switch between alternatives.
5. Infinite elasticity is a key assumption in perfect competition, where firms are price-takers and have no influence over the market price.

Review Questions

• Explain how infinite elasticity relates to the concept of polar cases of elasticity.
  • Infinite elasticity is one of the two polar cases of elasticity, the other being perfectly inelastic demand. Polar cases represent the extreme ends of the elasticity spectrum, where demand is either infinitely responsive to price changes (infinite elasticity) or completely unresponsive (perfectly inelastic demand). These polar cases serve as theoretical benchmarks to understand the various degrees of elasticity that can occur in real-world markets.
• Describe the key characteristics of a demand curve with infinite elasticity and how it differs from other demand curves.
  • A demand curve with infinite elasticity is perfectly horizontal, meaning that the quantity demanded changes infinitely in response to even the smallest change in price. This is in contrast to other demand curves, which have varying degrees of slope, indicating different levels of responsiveness to price changes. The perfectly horizontal demand curve of infinite elasticity implies that consumers will buy any quantity at the prevailing market price, as they are highly sensitive to price fluctuations and can easily substitute the good for alternatives.
• Analyze the role of infinite elasticity in the context of perfect competition and explain why it is a key assumption in this market structure.
  • Infinite elasticity is a crucial assumption in the model of perfect competition, where firms are price-takers and have no influence over the market price. In a perfectly competitive market, the demand curve faced by each individual firm is perfectly horizontal, or infinitely elastic, because the firm's output is a small fraction of the total market supply. This means that the firm can sell any quantity it chooses at the prevailing market price without affecting that price. The assumption of infinite elasticity simplifies the analysis of perfect competition and allows for the derivation of important conclusions, such as the firm's profit-maximizing output level being where price equals marginal cost.

Related terms

Perfectly Elastic Demand:

Perfectly elastic demand is a situation where the quantity demanded of a good changes infinitely in response to even the smallest change in price, resulting in a perfectly horizontal demand curve.

Constant Elasticity:

Constant elasticity refers to a demand curve where the elasticity remains the same regardless of the price level, meaning the responsiveness of quantity demanded to price changes is consistent.

Polar Cases of Elasticity: Polar cases of elasticity refer to the two extreme cases of demand elasticity - perfectly elastic demand and perfectly inelastic demand, which represent the upper and lower bounds of the elasticity spectrum.