Demand curve when the Price elasticity of demand is unitary P1’ P2’ Q1’ Q2’Inelastic demand curve P’1 P’2 Q’1 Q’2 As depicted in the above diagrams of elastic, unitary and inelastic demand curves one can see the slope of the curve is getting steeper when the price elasticity of demand is decreasing. In addition, in the elastic demand curve diagram the total revenue is increasing when the price reduces from P1 to P2 because the quantity is increasing more compared to the price reduction and there fore the total revenue increases if the demand is elastic.
In the second diagram when the price elasticity is equal to 1 the total revenue do not change because the price change percentage and quantity change percentage is equal. It can be seen from the unitary price elasticity demand curve diagram when the price is reduced from P1’ to P2’ the quantity is increased by the same percentage from Q1’ to Q2’. And the total revenue does not change when the price reduced or increased. However, as depicted in the inelastic demand curve when the price is reduced from P’1 to P’2 the quantity demanded is increased by a lesser percentage than the price reduction and there fore the total revenue is reduced.
There fore the consequences of price increase or reduction when the price elasticity is elastic, unitary and inelastic can be summarized as below. Price Elasticity of DemandPrice changeTotal revenue changeElasticity greater than price increase reduction in revenue Or elastic demand price reduction increase in revenueElasticity is equal to 1 price increase no change in revenueOr Elasticity is unitary price reduction no change in revenueElasticity less than 1 price increase increase in revenue Or inelastic demand price reduction reduction in revenueFactors affecting price elasticity of demand The price elasticity of demand depends on several factors.
The most important factors are whether the product concerned is produced by a monopoly industry or by a competitive industry structure where there exist many substitutes. For example if say in a mobile telephone market there exist many companies competing and customers can switch to other companies with little switching costs then the demand for the product will be most probably elastic.
However, if there is considerable switching costs then the demand will be inelastic. In contrast if say railway company provides services say in peak periods then with little competition from other railway companies and there exist little choices for such services the demand for rail services in peak periods will be inelastic. However, in off peak periods the demand for rail services becomes elastic because the customers can use other modes of transport if the prices are high and they have more choices in off peak periods.
The other factor, which affects elasticity of demand, is whether it is a necessary product or luxury product. Necessary products are mostly inelastic compared to luxury products. However, the degree of elasticity differ for necessary depends on substitutes as well as for luxury products and whether the market structure is competitive, monopoly or imperfect competition or oligopoly market structure. The other factors affecting the elasticity of demand is the consumer buying habits. For example the demand for alcohol and Cigarettes tend to be inelastic than elastic. The other factor, which affects the price elasticity of demand, is the percentage of income spent on by consumers of a product.