What Is Inelastic Demand?
Inelastic demand takes place when the demand for a product doesn’t change as much as the price does. For instance, if the price rises 20%, but the demand only goes down by 1%, that product’s demand is said to be inelastic.
Read on to learn more about inelastic demand, how it works, and when it typically takes place.
What Is Inelastic Demand?
Inelastic demand takes place when a product or service’s price drops or rises, but people continue to buy about the same amount of it. This often happens with necessities like food and gasoline. Even when the price of gas increases, drivers still have to purchase the same amount to fill their tanks. Likewise, they aren’t likely to buy more gas even if the price goes down.
There are three types of demand elasticity, and inelastic demand is one of them. Demand elasticity describes how much demand changes when price changes. The other two types of demand elasticity are:
- Elastic demand, when a change in price impacts the quantity that is demanded.
- Unit elastic demand, when a change in price causes an equal change in the demand.
How Inelastic Demand Works
Demand elasticity is calculated very easily. Simply divide the percentage change in the quantity demanded by the percentage change in the price. Let’s say that the quantity demanded changes in the same percentage as the price does. In this case, the ratio would be one. But if the price dropped 10% and the quantity demanded increased by 10%, the ratio would be 0.1/0.1 = 1. According to the Law of Demand, the amount purchased moves inversely to price; you can ignore the plus and minus signs. The ratio of one is called unit elastic.
When the quantity to price ratio equals a number more than one, that’s called elastic demand. If the price dropped by 10% and the amount demanded rose by 50%, then the ratio would be 0.5/0.1, or 5.
Let’s talk about the other extreme as well. If the price dropped by 10%, but the quantity demanded didn’t change, the ratio would be 0/0.1, or zero. This is called being perfectly inelastic. When the ratio of quantity demanded divided by price is a number between zero and one, inelastic demand occurs, and the ratio is called perfectly inelastic. When the ratio is one, it is unit elastic.
For instance, beef prices in 2014 rose by over 20%, but demand only fell by 3.9%. This result showed the demand for beef was fairly inelastic. The demand schedule for beef displays an example of how real-life factors affected beef’s demand in the year 2014.
What Is the Inelastic Demand Curve?
Looking at the demand curve is another way to tell whether the demand for something is inelastic. The curve will look steep since the quantity demanded doesn’t change as much as the price does. To be more specific, any curve steeper than the diagonal unit elastic curve is considered inelastic.
The curve will be steeper the more inelastic the demand is. If the demand is perfectly inelastic, the curve will actually be a vertical line.
Regardless of the price, the quantity demanded won’t budge. You can see this below with the vertical line in the chart, which is a perfectly inelastic curve.
The demand for each individual is determined by five factors. These five factors are:
- Price of alternatives
When discussing aggregate demand, there is a sixth determinant: the number of buyers. The demand curve displays the way the quantity changes in response to the price. If and when one of the other determinants changes, the entire demand curve will shift. Even though the price stays the same, more or less of that good or service will continue to be demanded.
Examples of Inelastic Demand
In the real world, there’s no example of a good or service with perfectly inelastic demand. If this happened, the supplier could charge as much as they wanted, and people would still have to buy it.
The only example that would come close would be if a person managed to own all of the air or all of the water on the planet. There is no substitute for either one; people have to have both air and water, or they will die. But even that example is not perfectly inelastic; the supplier couldn’t charge 100% of everyone’s income. This is because people would still need some money for food. Otherwise, they’d starve within a short period of time. As you can see, it’s challenging to think of a situation that would create perfect inelastic demand.
Some products do come close, though. For instance, gasoline is a product that drivers must purchase a certain amount of each week. The price of gas changes every day. Prices skyrocket when there are drops in supply. This took place in 1973, during the OPEC oil embargo, when the Organization of the Petroleum Exporting Countries stopped oil exports to the US.
Since people can’t immediately change their driving habits, they’ll continue to buy gas. If they wanted to shorten their commute time, they’d likely have to change jobs. Even then, they’d still need to get groceries on a weekly basis. If possible, they could go to a closer store to conserve gas. But the majority of people will tolerate higher gas prices before making drastic changes to their everyday routine. You can see how this type of situation would cause demand-pull inflation.
Inelastic Demand vs. Elastic Demand
To make the difference between elastic and inelastic demand clear, remember that inelastic demand refers to goods, products, or services that don’t lose demand, even if their price changes.
In contrast, elastic demand is a term for products that fluctuate in demand if their prices change. For instance, if a product’s price goes up, consumers are likely to buy less of it. On the other hand, if the product’s price decreases, consumers might buy a lot more of it.
- In cases where the demand for a product does not change as much as the price does, inelastic demand occurs.
- Looking at the demand curve is a simple way to tell whether the demand for something is inelastic.
- Products that aren’t very responsive to price changes, like toilet paper and gasoline, frequently experience inelastic demand.
- Inelastic demand is exemplified by the demand for gasoline. Even in cases of a price increase or decrease, consumers won’t buy more or less gas.
- Inelastic demand is graphically represented by a steep demand curve. The more inelastic the demand, the steeper the curve.