Unit 1
Unit 3
The Law of Demand
The Elasticity of Demand
Demand curves for different products will look very unlike one another. Consider two products – bread and Cherry Ripe chocolate bars. These products are both food items, and yet the demand line for each will be unique.
The Demand for Bread
Bread is considered a necessity. Nearly all people in the economy buy bread, and if it became more expensive it is likely that they would sacrifice other items in order to continue buying the bread. As such, a change in the price of bread would result in only a small change in the quantity demanded. The demand curve for bread may look something like this:
The Demand for Bread
In this example we can see that an increase in price from $2.50 to $5.00 (a 100% increase) has resulted in a decrease in quantity from 1000 loaves of bread to 800 loaves (a 20% decrease). As the percentage change in price is higher than the percentage change in quantity, we refer to this as an inelastic demand curve – a large change in price will result in only a small change in quantity.
The Demand for Cherry Ripe Chocolate Bars
On the other hand, it is also possible to have an elastic demand curve. This is the opposite – when a small change in price will result in a large change in quantity. Let us now consider what the demand curve for Cherry Ripe chocolate bars must look like. People who purchase Cherry Ripes have many other options – if a Cherry Ripe was too expensive they could buy a Violet Crumble or a Mars Bar instead. Also, a Cherry Ripe is not considered a necessity; it is a want.
It follows then that if we have a small change in price, this could lead to a large change in quantity. The demand curve for Cherry Ripe bars may look something like this:
The Demand for Cherry Ripe Chocolate Bars
In this case we can see that the price has increased from $1.60 to $2.00 – an increase of 25%. As a result of this increase, the quantity fell by 80% - from 1000 bars to 200. Obviously in this case the percentage fall in quantity is much higher than the increase in price. As the demand for this product is highly responsive to a change in price, we refer to this as an elastic demand curve.
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