Inelastic demand

July 27, 2023
10 MIN READ
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When the price of an item or service fluctuates, the quantity remains constant. Inelastic demand states that when the cost of an item or service rises, customers' purchasing habits remain relatively constant. When the price falls, consumers' purchasing habits likewise remain relatively unaltered. A fully inelastic good is one in which demand does not fluctuate independently of price; nonetheless, no such commodity or service exists. Inelastic contrasts with elastic, which experiences considerable variations in demand as the price changes. Medical supplies, for example, are regarded as inelastic, but luxury things, such as cruises and expensive watches, are deemed elastic.

What is inelastic demand?

In economics, inelastic demand refers to a small or no shift in demand in response to a shift in the cost of an item. Examples are the demand for fuel, power, water, and food. Demand is elastic if its price elasticity is larger than one. If it is lower than one, it is considered inelastic. A flattened demand curve is a defining feature of an elastic commodity. A vertical curve, on the other hand, implies a completely inelastic product, whereas a steeper slope denotes an inelastic item.

The concept of inelastic demand

Inelastic demand is connected with necessities such as water, fuel, and electricity; because these are necessities, the amount and pattern of use do not correlate with price changes.

The price elasticity of demand formula assesses whether an item has inelastic demand.

Price elasticity of demand = % change in quantity demanded / % change in price

Assume that the numerical figure of price elasticity of demand resulting from the preceding calculation is less than one. The good is more inelastic in such instances, and if it is more than one, the demand for an item is elastic. When it is less than one, the percentage increase or decrease in price will only impact the amount requested. Furthermore, if the price elasticity is one, profit is maximized.

The income demand elasticity is calculated by substituting the % change in income for the % change in price. It will be 0 or low for inelastic items. It means that the amount needed will not change in response to changes in income. Again, the elasticity of demand for required or typical products is zero or low.

Perfectly inelastic goods

There are no instances of things that are completely inelastic. If there were, manufacturers and suppliers could charge whatever they wanted, and customers would still have to purchase them. The only things that come close to being inelastic are air and water, which no one can manage.

Economic downturns and depressions reduce demand for elastic products while having little to no effect on demand for inelastic items.

However, certain things are almost completely inelastic. Take gasoline, for example. These prices fluctuate regularly, and as supply falls, prices will rise. People require gas to drive their automobiles and will continue to need it because they may be unable to change their driving habits, such as commuting to work, going out with friends, driving the kids to school, or shopping.

These may alter, such as changing jobs for one closer, but individuals will continue to buy gas, even at a greater price, before making any dramatic adjustments to their lives. 

Factors that cause demand to be inelastic

1.     Alternatives

When the cost of a product rises and an alternative product is readily available, demand becomes more elastic. Demand is substantially less elastic when there are limited to no alternatives. Gasoline is an obvious example. Because there is no replacement for the gasoline required to carry us from one location to another, we will always purchase gas regardless of price.

2.     The distinction between necessities and pleasures

Demand does not greatly fluctuate when something is required for daily living, regardless of price variations. This item or service is regarded as essential. A luxury, on the contrary, is desirable but not required. When a family picks medication (necessity) and sweets (luxury), they will prefer the medicine, regardless of cost.

Generally, the more essential the commodity, the less elastic its demand is due to the scarcity of viable substitutes. The more superfluous (luxurious) the commodity, the more elastic its demand.

3.     Income or budget of a consumer

With even a little price rise, a product that consumes a significant percentage of a customer's budget might become unreasonably costly. For instance, a customer's housing budget maybe half their salary. If housing costs rise even little, consumers are more inclined to relocate to less expensive housing rather than forego food, medication, or power. In summary, the greater the proportion of a consumer's budget that an item uses, the more elastic the demand.

On the contrary, low-priced products may stay inelastic regardless of price treble. Table salt, for instance, is inexpensive. Most individuals would still purchase it if the price doubled (around $2) since a dollar is not a huge chunk of their budget.

4.     Short-run versus long-run

Demand elasticity is often lower in the short term because customers have no time to respond or get stuck in their present decision. It is referred to as the cost of switching goods. In the long term, however, they will have a higher chance of discovering replacement items as time passes. As a result, demand is less elastic in the short term than in the long run.

5.     The period after a price change

The longer customers have to respond to a price shift by finding less costly replacements, the more elastic demand.

6.     Monopoly vs. competition

A product or service generated by a single source (a monopoly) will probably have inelastic demand. Goods in a competitive market seem to have higher elastic demand owing to the buyer's availability of substitutes.

7.     Items that occur seldom

Price fluctuations are unlikely to affect you if you purchase anything seldom. For example, a vehicle is often bought every few years. Thus price fluctuations have little effect on demand. In most circumstances, if the cost of a vehicle increases, the acquisition of a new one may be delayed until the price drops again.

8.     Usual consumption

When a product has become the customer's default option, the price adjustment of the item has less of an impact on them. For instance, since smokers are persistently hooked to cigarettes, the price of cigarettes will not alter.

9.     Peak demand vs. off-peak demand

Due to the vast quantity of purchasers, demand tends to stay price inelastic during peak periods and more elastic during off-peak hours (or off-season periods).

10.  Location

Demand will be more inelastic if you have the finest location. Hotels with a beautiful sea view often charge more than those in the suburbs.

Curve/graph of inelastic demand

Plotting a demand curve helps understand the many forms of demand elasticity and adds elements to the elastic vs. inelastic vs. inelastic demand situation.

1.     Perfectly/completely inelastic  

When demand stays constant despite price swings, it displays a demand curve perpendicular to the x-axis showing quantity. A steep demand curve shows that the good or service is completely inelastic. The slant is also zero since the completely inelastic demand curve is vertical.

2.     Inelastic

 Assume that a big price adjustment may result in a little change in the amount needed. In such instances, the demand curve will be steeper or nearly perpendicular, with a larger slope, rather than vertical or perpendicular.

3.     Elastic

A price change reasonably impacts the amount requested if a product is elastic. The demand curve will be flat with a lower slope.

As a result, a completely inelastic product has a vertical demand curve. On the other hand, a steeper curve indicates that the good has a reduced cost elasticity of demand. A flatter slope, on the other hand, implies that demand is more price elastic.

The effect of the tax on inelastic demand

1.     Tax moves the supply curve to the left, causing prices to rise and demand to decline.

2.     If demand is inelastic, the tax will have an impact of greatly boosting the price while just marginally lowering the supply. It will help the government raise its tax income.

3.     Consumers will bear the majority of the levy.

The difference between elasticity and inelasticity

Demand elasticity is the extent to which demand reacts to a shift in an economic component. The most frequent economic component used to calculate elasticity is price. Other characteristics comprise income level and availability of substitutes. Elasticity evaluates how demand moves in response to changes in economic circumstances. Inelasticity occurs when demand stays consistent regardless of price changes.

Demand elasticity

The elasticity of demand, also known as demand elasticity, measures how demand reacts to changes in price or income. Because the price of an item or service is the most frequent economic component used to quantify it, it is typically alluded to as price elasticity of demand.

An elastic product is one in which a change in price causes a large movement in demand; the more replacements accessible to a product, the more elastic the product is. The percentage change in the quantity requested divided by the percentage change in cost yields the price elasticity of demand. The demand is deemed elastic if the quotient is larger than or equal to one. Demand is termed inelastic if the outcome is less than one.

Luxury goods and consumer-optional purchases, like brand-name cereal or candy products, are typical examples of high-elasticity items. Food may be swapped, and brand names can be easily replaced with lower-cost alternatives. A shift in the price of a luxury automobile may induce a change in the amount desired, and the magnitude of the price shift determines the degree to which the demand for the item changes and, if so, how much.

Other variables, like income level and accessible replacements, impact the demand elasticity of products and services. Individuals may save their funds instead of updating their mobile phones or purchasing designer handbags during job loss, resulting in a dramatic shift in the use of luxury items. The availability of replacements for a product or service renders a product more price sensitive. If the cost of Android phones rises by 20%, for example, demand may move from Androids to iPhones.

Demand inelasticity

Inelasticity of demand occurs when demand for an item or service remains constant despite price fluctuations. Inelastic items are often necessary in the absence of adequate replacements. Utilities, prescription medications, and tobacco products are the most prevalent things with inelastic demand. Businesses that sell such items have more pricing freedom since demand stays steady regardless of price changes. Essentials and medical treatments are inelastic, while luxury items are the most elastic.

Demand cross-elasticity

The cross elasticity of demand is a term that measures the effectiveness of one product's quantity sought when the cost of another varies. Cross-elasticity of demand may apply to either alternative or complementary items. When the cost of one thing rises, the demand for a replacement good rises as buyers seek a cheaper alternative to the more costly item.

Demand elasticity in advertising

The advertising elasticity of demand (AED) indicates how sensitive a market is to changes in advertising intensity. The capacity of a marketing initiative to create additional sales determines its elasticity.

Positive advertising elasticity indicates that a rise in advertising results in a consequent demand for the promoted products or services. A good marketing effort will increase demand for a product.

Conclusion

The fixed quantity of an item, when its price fluctuates, is referred to as inelastic. When the price of a commodity or service fluctuates, but the quantity required remains stable, the product or service is deemed inelastic. Companies must tread a tight line between pricing a product or service and maintaining strong demand. The demand for luxury things is more sensitive to price fluctuations, but the demand for basic items is not. Companies must take these aspects into account when pricing their products.