"Inelastic demand" is a term that economists use to refer to a situation where demand for an item remains the same, no matter how far its price rises or falls.
It's important to understand this concept if you're learning about economics. Keep reading to learn about inelastic demand and how it works.
Definition and Examples of Inelastic Demand
A product or service is said to have elastic demand when the change in quantity demanded is large when there is a change in price. Products and services have inelastic demand when the change in quantity demanded is small when there is a change in price.
Gasoline is an inelastic demand example, because the amount people buy remains roughly the same, even when prices increase. Likewise, they don't buy much more even if the price drops. However, gas doesn't have a perfectly inelastic demand, where demand never changes regardless of price.
There aren't many real-life examples of perfectly inelastic demand. If there were, then whoever was selling something with inelastic demand could charge any amount, and consumers would have to pay it.
How Does Inelastic Demand Work?
Inelastic demand, as a concept, exists because the concept of elastic demand requires an opposing concept. If the demand for one item always experiences large changes with its price, there must be demand for another that experiences no changes in price. That allows economists to measure the sensitivity of prices and demand for goods and services.
The Law of Demand says that the amount purchased should move inversely to price, ignoring the positive or negative aspects. That means that there should be a decrease in demand as prices increase, and an increase in demand as prices decrease.
To calculate demand elasticity, you divide the percentage change in the quantity demanded by the percentage change in the price. For instance, if the price of bananas were to drop by 10% with a corresponding demand-quantity increase of 10%, the ratio would be 0.1/0.1 = 1.
The ratio of one is called "unit elastic," the term for when a change in quantity demanded is accompanied by an equal change in price.
Elastic demand occurs when when the ratio of quantity demanded to price is more than one. For example, if the price dropped 10%, and the amount demanded rose 50%, the ratio would be 0.5/0.1 = 5. On the other end, if the price dropped 10%, and the quantity demanded didn't change, the ratio would be 0/0.1 = 0. That is known as being "perfectly inelastic."
Inelastic demand occurs when the ratio of quantity demanded to price is between zero and one unit elastic.
What Is the Inelastic Demand Curve?
You can also tell whether the demand for an item is inelastic by looking at its demand curve. Since the quantity demanded doesn't change as much as the price, it will look steep. It will be any curve that is steeper than the unit elastic curve, which is a 45-degree angle or less as measured from the chart's horizontal axis.
The more inelastic the demand, the steeper the curve. If it's perfectly inelastic, then it will be a vertical line.
Five factors determine the demand for an item. They are price, the price of alternatives, income, tastes, and expectations. For aggregate demand, the sixth determinant is the number of buyers. The demand curve shows how the quantity changes in response to price. If one of the other determinants changes, it will shift the entire demand curve. More or less of that good or service will be demanded, even though the price remains unchanged.
Inelastic Demand vs. Elastic Demand
|Inelastic Demand||Elastic Demand|
|Low changes in demand with price changes.||High changes in demand with price changes.|
|Real-life examples include utilities, prescription drugs, or gas.||Real-life examples include luxury items or non-essential items.|
To clarify the difference between inelastic and elastic demand, it's important to know that "inelastic demand" is a term reserved for goods, services, or products that don't lose demand even if the price to buy them changes.
By contrast, elastic demand refers to products that fluctuate in consumer demand if their price changes. For example, if an item's price goes up, consumers likely won't buy as much. If the price goes down, they may end up buying more than predicted.
- Inelastic demand in economics occurs when the demand for a product doesn't change as much as the price.
- You can tell whether the demand for something trends more toward inelasticity by looking at the demand curve.
- Inelastic demand applies to products that are hardly responsive to price changes, such as gasoline.
- A steep demand curve graphically represents it. The steeper the curve, the more inelastic the demand for that product or service is.
Iowa State University of Science and Technology. "Elasticity of Demand." Accessed Nov. 30, 2021.