Elasticity vs. Inelasticity of Demand: An Overview

Inelasticity and elasticity of demand refer to the degree to which demand responds to a change in another economic factor. Elasticity of demand measures how demand changes when other economic factors change. When a change in demand is unrelated to an economic factor, it is called inelasticity.

Price is the most common economic factor used when determining elasticity or inelasticity. Other factors include income level and substitute availability.

Elasticity of Demand

The elasticity of demand, or demand elasticity, refers to how sensitive demand for a good is compared to changes in other economic factors like price or income. It is commonly referred to as price elasticity of demand because price is the most common economic factor used to measure it.

The elasticity of demand helps companies predict changes in demand based on a number of different factors including changes in price and the market entry of competitive goods.

When the data is graphed, elasticity of demand has a negative slope. An elastic demand is displayed as a more horizontal, or flatter, slope.

It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. If the elasticity quotient is greater than or equal to one, the demand is considered to be elastic. A common example of an elastic product is gasoline. As the price of gas increases and falls with the international market, the demand (the distance driven by the population) rises and falls in near direct correlation. Gasoline has an elasticity quotient of one or greater and has a flatter slope on a graph.

If the elasticity quotient is less than one, the demand is considered to be inelastic.

Inelasticity of Demand

When demand for a good or service is static when its price or other factor changes, it is said to be inelastic. So when the price goes up, consumers will not change their buying habits. The same applies when the price goes down.

So if there is a 1 percent change in the price of a good, then the amount demanded or supplied will have less than a 1 percent change.

Since the quantity demanded is the same regardless of the price, the demand curve for a perfectly elastic good is graphed out as a vertical line. However, there are no clear examples of a perfectly elastic good. If this were the case, prices would skyrocket, with no change in demand. But there are some products that come close.

While many elastic goods have substitutes, inelastic goods do not. The most common goods with inelastic demand are food, prescription drugs, and tobacco products. Another common example of a product with inelastic demand is salt. The human body requires a specific amount of salt per pound of body weight. Too much or too little salt could cause illness or even death. Therefore, the demand for salt changes very little with the price. Salt has an elasticity quotient that is close to zero and a steep slope on a graph.

Key Takeaways

  • Elasticity of demand refers to the change in demand when there is a change in another factor such as price or income.
  • If demand for a good or service is static even when the price changes, demand is said to be inelastic.
  • Examples of elastic goods include gasoline, while inelastic goods are items like food and prescription drugs.