When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price. Conversely, if no substitutes are available, demand for a good is more likely to be inelastic.

Examples of price elastic demand

• Heinz soup. These days there are many alternatives to Heinz soup.
• Shell petrol. We say that petrol is overall inelastic.
• Tesco bread. Tesco bread will be highly price elastic because there are many better alternatives.
• Daily Express.
• Kit Kat chocolate bar.
• Porsche sports car.

Since demand changed by more than price, the good has elastic demand. If, on the other hand, the price increases by 1% and demand decreases by 0.5%, the good has inelastic demand. If both price and demand change by 1%, the good has unit elastic demand.

There are three main types of elasticities of demand: the price elasticity of demand (so popular that it is generally referred to as simply elasticity of demand), income elasticity of demand and cross elasticity of demand.

Price elasticity of demand is a measurement of the change in consumption of a product in relation to a change in its price. Expressed mathematically, it is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price.

Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.

To measure the elasticity of demand, divide the percentage change in quantity demanded by the percentage change in price. When this ratio gives you a result of more than one, that demand is considered elastic.

Availability of Substitutes This means that coffee is an elastic good because a small increase in price will cause a large decrease in demand as consumers start buying more tea instead of coffee.

Calculated own-price elasticities indicated relatively elastic responses by consumers for all categories except for compensated bulk ice cream. All expenditure elasticities were inelastic except for bulk ice cream, and most of the ice cream categories were substitutes.

When the price elasticity of a good is less than 1, it’s considered inelastic. That means a one unit increase in price resulted in a less than one unit decrease in demand. On the other hand, if the coefficient (the absolute value) is more than 1, the good is elastic.

For example, hamburgers have a relatively high elasticity of demand because there are plenty of alternatives for consumers to choose from, such as hot dogs, pizza, and salads. Gasoline and oil, however, have no close substitutes and are necessary to power equipment and transportation.

Demand for a good is said to be elastic when the elasticity is greater than one. A good with an elasticity of -2 has elastic demand because quantity falls twice as much as the price increase; an elasticity of -0.5 indicates inelastic demand because the quantity response is half the price increase.

Price Elasticity of Demand For example, a change in the price of a luxury car can cause a change in the quantity demanded. If a luxury car producer has a surplus of cars, they may reduce their price in an attempt to increase demand.

If a demand curve is perfectly vertical (up and down) then we say it is perfectly inelastic. If the curve is not steep, but instead is shallow, then the good is said to be “elastic” or “highly elastic.” This means that a small change in the price of the good will have a large change in the quantity demanded.

Perfectly inelastic is where a small increase or decrease in the price of a product will have no effect on the quantity that is demanded or supplied of that product. There is no elasticity of demand or supply for the product. This will rarely happen in real life, but it is used as a valuable economic theory.

Perfectly inelastic supply means that quantity supplied remains the same when price increases or decreases. Sellers are completely unresponsive to changes in price. Similarly, while perfectly inelastic demand is an extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves.

The only thing close to a perfectly inelastic good would be air and water, which no one controls. But there are some products that come close to being perfectly inelastic. Take gasoline, for instance. These prices change frequently, and if the supply drops, prices will jump.

Perfect inelastic supply is when the PES formula equals 0. That is, there is no change in quantity supplied when the price changes. Examples include products that have limited quantities, such as land or painting from deceased artists.

The demand for Nike products is price inelastic because the increase in price have little to minor changes on the quantity demanded. If a large change in price is accompanied by a small amount of change in quantity demanded, the product is inelastic.