Price Elasticity of Demand (PED) can look like one of the three graphs shown below:
So what is the diagram above?
The diagram above shows the three different shapes you may expect to see a demand curve – remember that a demand curve can look like anything though. As I say in my theory of demand video, theoretically demand could even be upward sloping if for example we are looking at an antique painting or designer handbag where as price increases so does the demand.
What different PEDs do the demand curves represent?
D0 – This represents the standard demand that most products have which is that demand falls from the highest prices the curve is elastic. This is because when prices fall more people are able to afford it (income effect). Then as we go to that bendy bit in the middle (sorry to write in such an informal manner) we see unitary elasticity where the percentage changes in demand are equal to the percentage changes in prices. The last vertical but shows inelasticity. When prices are low to begin with there is a limit to how much demand can increase when prices fall further. Compare the difference when a price falls from £20 to £10 and that of £2.50 to £1.25.
D1 – This is an absolutely inelastic demand curve. No matter how much price changes demand is not affected. This is a more theoretical concept than one that exists in real life. An example of a good which has almost zero elasticity like this curve is the class A drug Heroin. No matter how much price increases demand is not likely to be affected because people are addicted and are prepared to pay the premium. However, even the demand for heroin is not absolutely inelastic simply because the price will affect the demand from those who want to try the drug for the first time. [Please note I am not trying to encourage drug abuse – I’m simply using it to prove a point]
D2 – This is the opposite to D1. This is an infinitely elastic demand curve. What this means is that any changes in price will kill all the demand as demand is only present for that particular price. Again this is a more theoretical abstract concept than one that actually exists in real life. For example, a good may be valued at £5 and any increase even £5.01 will kill demand 100% because people are not prepared to pay even a pence more. It is the same if the price were to fall to £4.99. The demand is absolutely elastic meaning that it is 100% affected by changes in price.