Elastic, Inelastic, and Unit Elastic Demand

The number 1 is the dividing line because price elasticity of demand compares two percentage changes: percent change in quantity demanded divided by percent change in price. When quantity swings by a bigger percentage than price did, the ratio tops 1 and demand is elastic. When quantity barely budges compared to the price change, the ratio falls short of 1 and demand is inelastic. Land exactly on a ratio of 1 and you get unit elastic demand, where the two percentages match.

On a graph, these three cases differ in how much the quantity axis reacts as you move along the curve at a given price. An elastic curve stretches a long way horizontally for a small vertical price move. An inelastic curve barely moves horizontally even for a big price drop. The extreme cases sit at the ends: a perfectly inelastic demand curve is a vertical line, quantity never changes no matter the price, and a perfectly elastic demand curve is a horizontal line, any price above one level sells zero and buyers will take any quantity at exactly that price.

This sits right behind what a tax or price control does to a market, because elasticity determines who absorbs a tax and how large a shortage or surplus a price control creates. A steep inelastic demand curve lets sellers pass most of a tax on to buyers, while an elastic one forces sellers to eat the cost themselves. Getting comfortable with the elasticity number now, rather than just eyeballing curve steepness, is what makes those later tax and surplus questions solvable.