What we are doing when we calculate Arc Elasticity of demand for a normal good is seeing how far away the demand for the good is to a one-to-one ratio. A one-to-one ratio would mean that for every 1% increase in price there will be a 1% decrease in demand. This is called Unitary (or Unit) Elasticity. A coefficient of 2 in absolute terms means that for every 1% increase in price there will be a 2% decrease in demand.

A coefficient of 0.5 in absolute terms indicates that for every 1% increase in price there will be a corresponding 0.5% decrease in demand.

Perfect Inelasticity

It could happen that the coefficient will turn out to be Zero. For example, if the same amount of electricity is going to be used even though price has changed, the result of the Arc Elasticity formula given above will be Zero. In Economics we say that this is Perfect Inelasticity. Regardless of the price, the same quantity will be demanded. This is represented diagrammatically by a perfectly vertical demand curve.

As the price rises from P to P1, or as the price falls from P1 to P, the quantity demanded (Q) remains the same.

Inelastic - but not Perfect

Price Elasticity of Demand is deemed to be Inelastic if the result of working out the formula is greater than 0 and less than 1, in absolute terms. This is shown in a diagram by a demand curve with a downward slope which is nearer to being vertical than it is to being horizontal. The nearer it is to being vertical, the greater the degree of inelasticity - the nearer the answer is to being Zero.

At price P, quantity Q is being demanded. If the price rises by, say 5%, from P to P!, then quantity demanded falls from Q to Q1, say 1%. Therefore, a change in price will bring about a smaller change in the quantity demanded. Once again, if the producer is trying to maximise revenue, she will increase the price of the good. As for Perfect Inelasticity, an increase in price will bring about an increase in revenue; a decrease in price will result in a decrease in revenue

Perfect Elasticity

Goods are said to have Perfect Elasticity if the result of working out the formula is infinity. This would mean that the demand for a good at a given price is infinite, and that none would be demanded at any other price. This is shown on a diagram as a perfectly horizontal demand curve.

With Perfect Elasticity, a supplier would not change the price being charged because it would bring about a total loss of revenue. An infinite quantity would be demanded at price P, and none would be demanded at any other price.

Most reasonable people (including budding economists) would consider that perfect elasticity does not, and could not, exist. For example, if consumers are acting rationally, and are willing to pay price P for a product they are also willing to pay a price less than P for the same product. This would appear to make a nonsense of Perfect Elasticity.

• While it is true, however, that perfection may not exist in any walk of life, Perfect Elasticity is used as a type of benchmark - as a theoretical position to judge the relative elasticities of other goods.

In other words, the higher the coefficient (the nearer to "infinity"), the greater the elasticity of demand. So a good with a price elasticity of demand of 6 (in absolute terms) will be twice as demand elastic as a good with a price demand elasticity of 3 (in absolute terms).

• Perfection is used to assess how near, or how far, the elasticity is to infinity or from zero.

Elastic - but not Perfect Elastic

When calculating the formula results in an answer which is greater than 1 in absolute terms (and less than infinity), price elasticity of demand is said to be Elastic.

This is illustrated on a diagram which shows the usual downward sloping demand curve, with a slope which is nearer to being horizontal than it is to being vertical.

When the price increases from P to P1 (say 1%), the demand for the good will fall off by the difference between Q1 and Q (say 2%). Logic would then show us that a supplier wishing to increase revenue would reduce prices if the demand for the products are elastic. If the price goes up, the total revenue from the sale of the product goes down: if the price goes down, the total revenue from the sale of the product will rise. Why? As price goes up by 1%, demand will fall off by more than 1% - this must result in a reduction of revenue.

Unity or Unitary Elasticity of Demand

When Price Elasticity of Demand is Unitary it means that for every 1% change in price there will be a corresponding 1% change in demand in the opposite direction. When prices rise by 1%, the demand will fall by 1%, and vice-versa.

Unity is shown on a chart by a demand curve which is the shape of a rectangular hyperbola.

• A rectangular hyperbola is a curve where, if we choose any given point on it and extend a line to the vertical and horizontal axes, the area of the rectangle so formed will be equal to the area of any other rectangle formed from any other point on the curve.

What is meant by that is that the area abcd,(c) being any point on the demand curve, is equal to the area aefg where (f) is any other point on the demand curve. Area aefg is also equal to area ahij, where i is also any point on the demand curve.

• What this shows is that regardless of whether the price is increased or decreased, the total revenue will remain the same.

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