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The price elasticity of a demand function measures the reaction of the quantity demanded by consumers after the price modification of a product. According to the law of demand, for normal goods, when the price of the product increases, the quantity demanded decreases, therefore there is an inverse relationship between price and quantity. Elasticity helps to assess the proportion of the modifications in the two variables.
<u>Let's analyse the following three goods:</u>
- Gasoline, is a good with an inelastic type of demand curve. When there is a change in the price of gasoline, the quantity demanded by consumers decreases in a lower proportion than the price increase. There are no easily available susbtitutes that consumers could purchase instead of gasoline to cover the same need. <em>The shape of this type of demand curve is represented by the first graph attached.</em>
- Cola, is a product with an elastic demand curve. When the price of a certain type/brand of cola drink increases its price, the quantity demanded of that product decreases in a larger proportion than the price increases. Consumers can easily switch and buy from a different cola brand or select a different type of soda drink to satisfy the same need. <em>The shape of this type of demand curve is represented by the second graph attached.</em>
- Two vending machines located next to each other provide an example of a perfectly elastic demand curve. If the price of one of the two vending machines increases for the same product, its quantity demanded would be reduced to 0, as all consumers will switch to the other machine which is located only a few centimetres away. <em>The shape of this type of demand curve is represented by the third graph attached.</em>
