What Is Inelastic? Definition, Calculation, and Examples of Goods

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.

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.

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. 

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.

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.