What Is Inelastic Demand?
"Inelastic" is an economic term referring to the static quantity of a good or service when its price changes. Inelastic demand means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.
- "Inelastic refers" to the static quantity of a good or service when its price changes.
- Inelastic demand means that when the price of a good or service goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.
- A perfectly inelastic good would be one where demand does not change regardless of the price; however, no such good or service is perfectly inelastic.
- Inelastic stands in contrast to elastic, where the latter witnesses significant changes in demand when the price changes.
- Essential items, such as medication, are considered to be inelastic, whereas luxury items, such as cruise trips and high-end watches, are considered elastic.
Understanding Inelastic Demand
Inelastic means that a 1% change in the price of a good or service has less than a 1% change in the quantity demanded or supplied.
For example, if the price of an essential medication changed from $200 to $202, a 1% increase, and demand changed from 1,000 units to 995 units, a less than 1% decrease, the medication would be considered an inelastic good.
If the price increase had no impact whatsoever on the quantity demanded, the medication would be considered perfectly inelastic. Necessities and medical treatments tend to be relatively inelastic because they are needed for survival, whereas luxury goods, such as cruises and sports cars, tend to be relatively elastic.
The demand curve for a perfectly inelastic good is depicted as a vertical line in graphical presentations because the quantity demanded is the same at any price. Supply could be perfectly inelastic in the case of a unique good such as a work of art. No matter how much consumers are willing to pay for it, there can never be more than one original version of it.
A good is considered relatively elastic if a 1% price change results in a greater change in the quantity demanded or supplied in the market.
A good is considered relatively inelastic if a 1% price change causes the supply or demand to move by less than 1%.
Formula and Calculation of Inelastic Demand
The formula for inelastic demand is:
Inelastic Demand = % change in the quantity demanded/ % change in price
A value less than 1 indicates inelasticity
For example, if the price of a good went from $5 to $8 (60%) and the demand went from 100 units to 70 units (30%), the value is 30/60 = 0.5, meaning the good is inelastic.
Perfectly Inelastic Goods
There are no examples of perfectly inelastic goods. If there were, that means producers and suppliers would be able to charge whatever they felt like and consumers would still need to buy them. The only thing close to a perfectly inelastic good would be air and water, which no one controls.
Economic recessions and depressions tend to hurt the demand for elastic goods while having little to no impact on inelastic goods.
But there are some products that come close to being perfectly inelastic. Take gasoline, for instance. These prices change frequently, and if the supply drops, prices will jump. People need gas to drive their cars, and they’ll still need to buy it because they may not be able to alter their driving habits, such as commuting to work, going out with friends, taking the kids to school, or going shopping.
These could change, like changing your job for another one closer, but people will still purchase gas—even at a higher price—before making any sharp, drastic changes to their lifestyles.
Elasticity of Demand
By way of contrast, an elastic good or service is one for which a 1% price change causes more than a 1% change in the quantity demanded or supplied. Most goods and services are elastic because they are not unique and have substitutes. If the price of a plane ticket increases, fewer people will fly.
A good would need to have numerous substitutes to experience perfectly elastic demand. A perfectly elastic demand curve is depicted as a horizontal line because any change in price causes an infinite change in the quantity demanded.
The inelasticity of a good or service plays a significant role in determining a seller's output. For instance, if a smartphone producer knows that lowering the price of its newest product by 5% will result in a 10% increase in sales, the decision to lower prices could be profitable; however, if lowering smartphone prices by 5% only results in a 3% increase in sales, then it is unlikely that the decision would be profitable.
Elastic Demand vs. Inelastic Demand
Demand drops in response to changes in price.
Usually a characteristic of goods with substitutes, where consumers can change behavior in response to prices.
Suppliers may struggle during a recession if consumers change their spending habits.
May include luxury or discretionary expenses.
Demand remains steady, even after sharp price increases.
Usually a characteristic of necessities, where customers cannot easily change their buying behavior.
Suppliers are to be severely affected by a recession.
Typically includes necessities and mandatory expenses.
What Is an Example of Inelastic Demand?
Inelastic demand refers to the demand for a good or service remaining relatively unchanged when the price moves up or down. An example of this would be insulin, which is needed for people with diabetes. As insulin is an essential medication for diabetics, the demand for it will not change if the price increases, for example.
What Is an Example of Elastic Demand?
Elastic demand refers to the demand for a good or service changing significantly when the price moves up or down. For example, if the total cost of a vacation to a specific destination increases by 20%, including airfare and accommodation, the demand for that vacation will decrease amongst consumers, especially those that are priced out, as there are other cheaper options for vacations.
What Does It Mean if Supply Is Inelastic?
A good is said to have inelastic supply if the availability of that good does not change significantly in response to price changes. This usually happens when suppliers are already operating at full capacity.
What Are Common Inelastic Goods?
Common inelastic goods include petrol, salt, water, products/services sold by monopolies, cigarettes, and diamonds.
What Does It Mean If Demand Is Perfectly Inelastic?
Demand is said to be "perfectly inelastic" if the demand for that product will remain consistent, regardless of any price changes. Perfectly inelastic demand occurs rarely in the real world. Close examples might include rare medicines, or fresh water in a time of drought: regardless of any price changes, these products will remain in demand.
The Bottom Line
Inelastic refers to the static quantity of a good when its price changes. When the price of a good or service changes and the quantity demanded of that good does not significantly change, the good or service is considered inelastic.
Companies walk a fine line between pricing a good or service and ensuring demand stays high. The demand for luxury items is more susceptible to changes in price while the demand for essential items is not. Companies must consider these factors when pricing their goods.