Question

What is meant by perfect inelasticity and infinite elasticity?

Short answer

Perfect inelasticity refers to a situation where the quantity demanded or supplied remains constant regardless of any changes in price, with an elasticity of zero. An example of perfect inelasticity is the demand for a life-saving drug. Infinite elasticity, also known as perfectly elastic, refers to a situation where the quantity demanded or supplied changes infinitely in response to an infinitesimally small change in price. An example of infinite elasticity is the trade of foreign currency in the Forex market. These concepts help in analyzing the effect of price changes on markets and in making informed decisions regarding economic policies and regulations.

Step-by-step solution

Define Elasticity

Elasticity is an economic concept that measures the responsiveness of the quantity demanded or supplied of a good or service to a change in its price. It is calculated as the percentage change in quantity demanded or supplied divided by the percentage change in price. In practice, there are two main types of elasticity: price elasticity of demand and price elasticity of supply.

Explain Perfect Inelasticity

Perfect inelasticity refers to a situation where the quantity demanded or supplied of a good or service remains the same, regardless of any change in price. In other words, the elasticity is equal to zero. This means that the demand or supply curve in this situation is a vertical line since the quantity remains constant at all prices. For example, suppose there's a life-saving drug that is the only option available for treating a specific disease. Regardless of the price, patients who need the drug will still have to buy it. So, the demand for this drug would be perfectly inelastic.

Explain Infinite Elasticity

Infinite elasticity, also known as perfectly elastic, refers to a situation where the quantity demanded or supplied of a good or service increases or decreases infinitely in response to an infinitesimally small change in the price. In this case, the elasticity is infinite, meaning that the demand or supply curve is a horizontal line since the price remains constant at all quantities. For example, consider the trade of foreign currency in the Forex market. If there is an infinitesimally small difference between the exchange rates of two different currencies, buyers and sellers will instantly adjust their trades to take advantage of the more favorable rate. This would imply that the supply and demand for currency are infinitely elastic.

Recap and Conclude

To summarize, perfect inelasticity refers to a situation where the quantity demanded or supplied remains the same regardless of changes in price, and the elasticity is equal to zero. Infinite elasticity, on the other hand, is a situation where the quantity demanded or supplied changes infinitely in response to an infinitesimally small change in price, and the elasticity is infinite. These concepts help economists and policymakers analyze the effect of price changes on markets and make informed decisions regarding economic policies and regulations.

Key concepts

Perfect Inelasticity

In the context of economics, perfect inelasticity is a theoretical scenario where the quantity demanded of a good or service does not change regardless of the price fluctuations. Imagine a vertical supply or demand curve on a graph—the price can go up or down, but consumers’ desire or producers’ willingness to sell that specific amount remains unchanged.

This concept is vital in understanding market dynamics, particularly for goods that are essential and have no substitutes, such as certain lifesaving medications. Here, even if the price skyrockets, the quantity purchased remains constant because consumers have no alternative but to buy the product to meet their critical needs.

Infinite Elasticity

On the flip side, infinite elasticity—or perfect elasticity—paints a picture of a market where the quantity demanded or supplied responds infinitely to the slightest change in price. A perfectly elastic demand curve is represented as a horizontal line on a price-quantity graph, displaying that even a minuscule price hike leads consumers to stop buying the product, turning to perfect substitutes instead.

For example, imagine walking into a store for salt. If there are dozens of identical salt brands, a tiny price increase for one brand would immediately cause consumers to switch to another. This makes understanding infinite elasticity crucial for businesses when setting competitive prices and for evaluating market entry conditions.

Economic Policies

Economic policies are strategies that government entities craft to influence the country's economic conditions. These policies can range from altering tax rates, modifying government spending, to adjusting interest rates via the central bank. Recognizing the concepts of perfect inelasticity and infinite elasticity is imperative for policymakers because it helps in predicting the outcomes of their interventions.

For instance, when imposing a tax on a good with perfectly inelastic demand, the total revenue is likely to increase substantially because consumers continue to purchase the same amount regardless of a higher price due to the tax. Therefore, understanding elasticity helps in crafting economic policies that aim to balance growth with social equitability.

Quantity Demanded

The term 'quantity demanded' refers to the total amount of a good or service consumers are willing to purchase at a given price during a certain period. It's a cornerstone of market analysis and is often influenced by various factors including price, consumer preferences, income levels, and substitute goods availability. It is important to note that 'quantity demanded' is a point value on the demand curve that reflects a specific price, rather than the entire curve itself.

Economists and businesses analyze the quantity demanded to gauge market responsiveness and to make decisions regarding pricing strategies, product placement, and inventory levels. Understanding how quantity demanded changes with price adjustments can determine profitability and market performance.

Supply Curve

In economic visuals, the supply curve is a graphical representation showing the relationship between the price of a good and the quantity of the good that producers are willing and able to sell. Generally, the curve slopes upward, illustrating the law of supply: as the price increases, producers are inclined to supply more because they stand to generate higher revenue.

The shape and position of the supply curve can vary depending on factors such as production costs, technology, and the number of sellers in the market. Understanding the supply curve is essential for predicting how market changes, climate conditions, or technological advancements might affect product availability and prices.