INELASTIC DEMAND: CHARACTERISTICS, PRODUCTS AND EXAMPLES - ECONOMY

The inelastic demand is one in which demand for a product does not increase or decrease interact with a fall or rise in price situation. People buy roughly the same amount, whether the price goes down or up.

Demand is price inelastic when a percentage change in the value of the product or service causes a smaller percentage change in demand. Products that are inelastic in price tend to have few substitutes and are deemed necessary by users.

That happens with things that people must have, such as gasoline. Drivers must buy the same amount, even when the price increases. Likewise, you don't buy much more even if the price drops. Inelastic demand is one of the three types of elasticity of demand.

This value describes how much demand changes when the price changes. The other two types are: elastic demand, when the quantity demanded changes more than the price does; and unit elastic demand, when the quantity demanded changes the same as the price.

characteristics

The calculation of the elasticity of demand is done by dividing the percentage change in quantity demanded by the percentage change in price. The law of demand says that the amount that is bought moves inversely to the price:

Elasticity = percent change in demand / percent change in price

The elastic demand is when the elasticity ratio is greater than one. If the price fell 10% and the quantity demanded increased 50%, then the ratio would be 0.5 / 0.1 = 5.

If the price fell 10% and the quantity demanded did not change, then the ratio would be 0 / 0.1 = 0. This is known as completely inelastic.

Inelastic demand occurs when the relationship between quantity demanded and price is between zero (perfectly inelastic) and one elastic unit.

Five factors determine the demand for each person: price, the price of substitutes, income, tastes and expectations. For aggregate demand, the sixth factor is the number of buyers.

Factors that make demand inelastic

No substitutes

If you have a car, there is no alternative but to buy gasoline to fill the car's tank. By relying on the train to get to work, the rail company can raise prices with little drop in demand.

Little competition

If a company has monopoly power, then it can charge higher prices. For example, prices at motorway service stations tend to be higher, because consumers cannot choose where to buy food without leaving the motorway.

Bought infrequently

If a product is bought infrequently (like salt) it is less likely to be price sensitive.

Small percentage of income

If a product like salt is a small percentage of income, price may be less of a concern.

Short term

In the short term, demand tends to be more price inelastic. It takes time for consumers to look for alternatives.

Demand curve

There are two types of inelastic demand curves: perfectly inelastic demand and inelastic demand.

You can determine whether demand is inelastic by looking at the demand curve. Since the quantity demanded does not change as much as the price, it will look steep. In fact, it will be a steeper curve than the elastic curve of the unit, which is diagonal.

The more inelastic the demand, the steeper the curve. If it is perfectly inelastic, then it will be a vertical line. The quantity demanded will not move, no matter what the price is.

Products with inelastic demand

Gasoline

Those with cars will need to keep buying gas to get to work.

Cigarettes

People who smoke become addicted to this vice and are willing to pay a higher price to maintain it.

Chocolate or salt

These products have no close substitutes.

Monopolies

Products in which companies have monopoly power, such as Apple computers, the iPhone, Microsoft Windows.

Medical treatments

They tend to be inelastic because they are necessary for survival.

Other cases

No matter how cheap bananas are, there will only be as many as can be eaten before they go bad. Ten bunches will not be bought even if the price drops 25%.

Since ground beef can be frozen, buying a third pack is just as good as the first. The marginal utility of ground beef is high; bananas lose their consistency in the freezer, so their marginal utility is low.

Examples

Perfectly inelastic demand

There is no real life example of something with a perfectly inelastic demand. If that was the case, then the supplier could charge an infinite amount and people would have to buy it.

The only thing that would come close would be if someone managed to own all the air or all the water on Earth. There is no substitute for either one; people must have air and water or they would die in a short period of time.

Even that is not perfectly inelastic. The provider could not collect 100% of the revenue in the world. People would still need some money to buy food or they would starve in a few weeks. It is difficult to imagine a situation that creates perfectly inelastic demand.

The demand could be perfectly inelastic in the case of a unique product such as a work of art. No matter how much you are willing to pay for it, there can never be more than one original version of it.