Overview
This lecture explains the two polar (extreme) cases of price elasticity of demand: perfectly elastic demand and perfectly inelastic demand, using examples and graphs.
Perfectly Elastic Demand
- Perfectly elastic demand means any price increase leads to zero quantity demanded.
- This is a hypothetical extreme and rarely exists in the real world.
- Example: Identical goods sold side by side—if one seller raises prices slightly, they lose all sales.
- Perfectly elastic demand occurs when there are many close substitutes.
- The demand curve is a horizontal line at the market price.
- The price elasticity of demand in this case approaches infinity.
Perfectly Inelastic Demand
- Perfectly inelastic demand means quantity demanded does not change regardless of price changes.
- Example: Life-saving medication that must be purchased at any price (within a reasonable price range).
- The demand curve is a vertical line, showing quantity does not respond to price.
- The price elasticity of demand is zero in this case.
- True perfect inelasticity is rare because ability to pay eventually limits demand.
Key Terms & Definitions
- Perfectly Elastic Demand — A demand situation where any price increase causes quantity demanded to drop to zero.
- Perfectly Inelastic Demand — A demand situation where quantity demanded remains constant no matter the price.
- Elasticity — A measure of how much quantity demanded responds to a change in price.
- Substitutes — Goods that can replace each other; close substitutes increase demand elasticity.
Action Items / Next Steps
- Review graphs illustrating perfectly elastic (horizontal) and perfectly inelastic (vertical) demand curves.
- Prepare for further segments covering elasticity in detail in upcoming videos.