On the AD/AS curve this could be graphed as a very flat demand curve becoming flatter the more elastic it gets up to the point where the demand curve is horizontal which indicates perfectly elastic demand. Another characteristic of elastic demand is that it is not a habit forming good or service which means that the consumer will not get addicted to it or be in need of it allowing them to respond comprehensively to a change in price.

A further concept of PED is price discrimination, which is the “microeconomic pricing strategy where the consumers are being charged different prices for the same god or service.” Businesses are able to discriminate inelastic goods and services as they know for sure that the consumers will be obligated to continue purchasing it. This discrimination often takes place on different days of the week (e.g petrol, airfares) or different times of the day (e.g Bus fares). Looking at petrol we can see that the prices are at their lowest on Tuesday and Saturday. As its regional fuel tax, different regions will have deferred tax rates which can also be considered price discrimination.

Graph 1:

This graph gives us a scenario in which relatively flat demand curve represents an elastic demand change. There is a relatively small increase in prices (20%), which resulted in a large decrease (30%) in quantity demanded. This would have occured due to a high number of substitutes to switch to. The proportionate change in quantity demanded is greater than the proportionate change in price, hence portraying how responsive elastic demand is.

Inelastic goods or services are tend to have a small to no number of substitutes in a monopolistic market and are necessities. Since it is a necessity consumers will have no choice but to continue purchasing. A small proportion of the consumer’s income is spent on inelastic goods or services and when being calculated with the formula above, the coefficient will be less than one resulting in a very steep demand curve up to the point where it is vertical meaning it is perfectly inelastic. Another characteristic of inelastic demand is that it is very habit forming, meaning that the consumer of these goods and services will often get addicted to them eg. Alcohol, Drugs etc. Although petrol is not addicting, it is still habit forming as we rely on it to drive to work, school or elsewhere and without it we wouldn’t be able to continue doing so. In addition to this the government will in most cases enforce a tax on inelastic products as the majority of the tax will fall down on the consumer rather than the producer.