Inelastic demand is a type of demand in which the quantity demanded does not change much in response to changes in price. In other words, people are not very sensitive to price changes when it comes to this type of good or service. An example would be something like food or water, which people need regardless of price changes. It is inelastic because people will still need them even if the price goes up. On the other hand, things like luxury goods or non-essential items have more elastic demand since people are less likely to purchase them if the price becomes too high.
In general, it is more common for necessities while elastic demand is more common for luxuries. This is because people are less likely to change their behavior when it comes to things, they need in order to survive or function on a daily basis. But when it comes to items that are not necessary, people are more likely to be price sensitive and only purchase them if the price is right. This is why businesses need to be aware of the type of demand for their products or services in order to price them accordingly.
Perfectly Inelastic Demand
Means that the quantity demanded will not change no matter what the price is. This is usually the case with necessities, such as food and shelter. People will still need to eat and have a place to live no matter how high the prices are.
In other words, the curve for a perfectly inelastic good is perfectly horizontal. A key characteristic is that consumers will continue to purchase the same quantity of the good or service, no matter how high the price is. There are a few reasons why it might occur. One reason could be that the good or service is a necessity, such as food or water. Another reason could be that there are no close substitutes for the good or service.
Some of the examples are:
- Diamonds: You’re probably not going to get a very good price for your old diamond engagement ring from a jeweler. That’s because there is a PID for diamonds. People are willing to pay just about any price for a diamond, because they know that they can’t find them anywhere else.
- Water is another good example of a PID. People need water to survive, so they’re willing to pay just about any price for it.
- Air is also an example. We need air to breathe, so we’re willing to pay just about any price for it.
- Blood is another example. Blood is essential for life, so people are willing to pay just about any price for it.
How does it work?
Inelasticity is when people are not very sensitive to price changes. This means that even if the prices of goods or services rise, people will still demand those goods or services. For example, people will still need to buy food and water no matter how high the prices are. This is often seen in basic necessities.
In contrast, elastic demand is when people are very sensitive to price changes. This means that if the prices of goods or services rise, people will stop demanding those goods or services. For example, if the price of a new car goes up by $1,000, people may decide to wait to buy the car until the price goes back down. Elastic demand is often seen in non-essential items. In general, inelasticity is when people are not very responsive to price changes, while elastic demand is when people are very responsive to price changes.
The rate of change in a product’s demand, also known as elasticity, is the degree to which demand varies when the price of a good changes. The following formula can be used to calculate elasticity:
Elasticity price = (percentage change in demand) / (percentage change in price)
This means that if the price of a good drops by 10%, and the demand for that good doesn’t change, then the ratio between how much people want the good and how much it costs is 0/0.1 = 0 (perfect). This means that people are not very responsive to changes in price when it comes to this good. A graphical presentation of a demand curve for a PI good will show it as a vertical line, because the demand for the good does not change no matter what the price is.
Inelastic Demand Curve
The curve is important to businesses because it helps them understand how much they can charge for their goods and services without losing customers. It is also important to economists because it can help explain why some prices are more resistant to change than others. The curve is typically downward sloping, but it can be upward sloping in some cases. The steeper the curve, the more inelasticity. It will be a vertical line if it’s perfectly inelastic.
Main factors that determine individual demand:
The demand for each customer is determined by five factors. These are;
- Tastes and Preferences
- Prices of alternatives
- Number of Household Members
An individual’s income is the single most important factor in determining their demand for goods and services. An increase in income will lead to an increase in demand as the individual can now afford to purchase more goods and services. A decrease in income will lead to a decrease in demand as the individual can no longer afford to purchase as many goods and services.
- Tastes and Preferences:
An individual’s tastes and preferences play a significant role in determining their demand for goods and services. If an individual prefers a certain good or service, they are more likely to demand it.
- Prices of Related Goods:
The prices of related goods also affect an individual’s demand for a good or service. For example, if the price of a good increases, the demand for its substitute will increase as well.
An individual’s expectations play a role in their demand for goods and services. If an individual expects their income to increase in the future, they may demand more goods and services today. Similarly, if an individual expects prices to decrease in the future, they may demand more goods and services today.
- Number of Household Members:
The number of household members also affects an individual’s demand for goods and services. A larger number of household members usually leads to a higher demand for goods and services.
Factors that make up Inelasticity:
There are a number of factors that can influence the elasticity of demand, making it either more or less elastic. Some of these factors include:
- The availability of substitutes:
If there are close substitutes for a good or service, then demand will be more elastic as consumers can easily switch to the substitute. For example, demand for Coke is more elastic than demand for Pepsi because there are many other brands of soda that consumers can purchase instead.
- The necessity of the good or service:
Necessities tend to have inelasticity because people need them and will continue to buy them even if prices go up. For example, the need for food is inelastic because people have to eat regardless of price changes.
- The time frame:
The longer the time frame, the more elastic the demand. This is because people have more time to adjust their spending habits in response to price changes. For example, demand for travel is more elastic in the long run than in the short run because people can change their vacation plans if prices go up.
- The income level of consumers:
Generally, the higher someone’s income is, the more elastic their demand will be. This is because high-income individuals have more disposable income and can therefore afford to switch to cheaper substitutes or do without certain goods and services altogether. For example, demand for luxury items like cars and jewelry is usually more elastic than demand for essential items like food and clothing.
These are just some of the factors that can influence the elasticity of demand. Ultimately, the elasticity of demand for any good or service will depend on the specific circumstances and characteristics of that good or service.
Inelasticity can be a problem for businesses because it means that they cannot increase prices without losing customers. It can also be a problem for economists because it can lead to higher prices and less economic activity. It is often caused by factors that are outside of the control of businesses and economists.
Impact of Tax:
When it comes to the impact of taxation on inelasticity, one has to understand that this can work both ways. On one hand, if the government taxes a good or service that has inelasticity, then it is likely that the price of the good or service will increase. This will lead to a decrease in quantity demanded, as consumers will be less likely to purchase the good or service.
On the other hand, if the government taxes a good or service that has inelasticity, then it is likely that the price of the good or service will decrease. This will lead to an increase in quantity demanded, as consumers will be more likely to purchase the good or service. In either case, it is clear that the taxation of inelasticity can have a significant impact on the market for the good or service in question.
Difference between elastic and inelastic
Elasticity is a measure of how demand for a good change in relation to price changes. If demand is elastic, then a small change in price will lead to a large change in the quantity demanded. In contrast, if the need is inelastic, then a small change in price will not have much of an effect on the quantity.
In general, necessities tend to have inelasticity while luxuries tend to have elastic demand. This is because people are less likely to cut back on their consumption of necessities even if prices rise, while they are more likely to cut back on their consumption of luxuries if prices rise.
There are a few exceptions to this general rule. For example, the need for some luxury items may be inelastic if they are seen as status symbols. Similarly, people may be resistant to cutting back on their consumption of certain necessities if they have a strong emotional attachment to them (such as coffee or cigarettes).
Elasticity can also vary depending on the time frame that is considered. For example, the need for a good may be inelastic in the short run but elastic in the long run. This is because people may not have many options for substituting other goods in the short run, but they may be able to find substitutes more easily in the long run.
Elasticity is an important concept because it can help businesses make decisions about pricing and production. It can also help policy makers understand how changes in taxes or subsidies might impact economic activity. Elasticity can be measured using a variety of methods, but the most common is the price elasticity of demand. This measures how much quantity demanded changes in response to a change in price. A good or service with a low-price elasticity of the need is said to be inelastic. While a good or service with a high price elasticity of demand is said to be elastic.
When is the demand is inelastic?
There are a few factors that can influence the elasticity of demand for a good or service. These include the availability of substitutes, income level, and the necessity of the item. For example, if there are a lot of substitutes for a good or service then the demand for it is likely to be more elastic since people can easily switch to another option.
On the other hand, if there are no good substitutes then the demand is likely to be inelastic. Additionally, income level can also affect elasticity since people with higher incomes are usually more insensitive to price changes than those with lower incomes. Finally, the necessity of the item also plays a role since people are less likely to change their behavior when it comes to things, they need in order to survive or function on a daily basis.
Which of the following is likely to have the most price inelastic demand?
- Colgate mint -flavor toothpaste
- Spear-mint flavor toothpaste
Answer: Correct Option is (A)
The good with the most price is likely to be a necessity, such as food or shelter. Price inelasticity occurs when a change in price does not significantly affect demand. This means that people will still purchase the good even if the price increases. There are many factors that can contribute to price inelasticity, such as income level, necessity of the good, and availability of substitutes.
Examples of Inelastic Products
Inelasticity is when the quantity demanded for a good or service does not change much in response to changes in price. An example of this would be if the price of gas went up by 10%, but people still continued to buy the same amount of gas. This means that their need for gas is inelastic and they are not very price sensitive.
Other examples include necessities like food and water, which people will continue to purchase even if prices go up. Additionally, things that people with substance disorders need, such as cigarettes or drugs, because they will continue to purchase them no matter how high the price gets.
Some more examples of such products are:
- Necessities like food and water
- Products with no close substitutes
- Products that are addictive or have a high degree of brand loyalty
- Gas & electricity
- Products with a low-price elasticity tend to be inelastic. This means that even a small change in price can have a relatively small effect on demand. Luxury items and essential goods are usually inelastic
In general, the demand for necessities is less sensitive to price changes than the demand for non-necessities. This is because people are more likely to cut back on spending on non-essentials than they are on essentials when prices rise. This means that a smaller price increase is needed to reduce demand for a necessity than for a non-necessity.
Thus, we can say that inelastic demand exists when the quantity demanded of a good or service is relatively unresponsive to changes in price. This means that even if the price of a good or service were to increase significantly, people would still demand roughly the same quantity as they did before. It can be caused by a number of things, including necessity, habit, and lack of close substitutes. While generally unfavorable for consumers, it can be beneficial for producers, as they can charge higher prices without significantly affecting sales.