Inelastic Demand: Definition & Example

What is Inelastic Demand

Inelastic demand is a term used in economics to describe a situation where the quantity of a product demanded by consumers does not change significantly in response to changes in its price. In other words, when the demand for a product is inelastic, consumers are willing to pay almost the same price for it, regardless of the change in price.

For example, if the price of insulin, which is a life-saving drug, increases, people with diabetes will continue to buy it, even if they have to pay more. This is because the demand for insulin is relatively inelastic since the consumers have no choice but to buy it to manage their health conditions.

In contrast, when the demand for a product is elastic, a change in price will cause a significant change in the quantity of the product demanded. For example, if the price of a luxury car increases, many consumers may decide to buy a cheaper car or postpone their purchase. This is because the demand for luxury cars is relatively elastic since consumers have many substitute options available to them.

How Inelastic Demand Works

Inelastic demand works by showing how responsive consumers are to changes in the price of a product or service. When the demand for a product is inelastic, a change in price results in a relatively small change in the quantity demanded of the product.

The reason for this is that when the product is essential or necessary, consumers have no choice but to buy it regardless of the price increase. They will continue to buy the product even if the price increases because there are no good substitutes available, or the substitutes are not readily available or are too costly.

For example, let’s say that the price of insulin, which is used to treat diabetes, increases. People with diabetes need insulin to manage their blood sugar levels and keep them alive, and they have no substitute for insulin. As a result, they will continue to buy insulin even if the price increases, resulting in a relatively small change in the quantity demanded of insulin. This is an example of inelastic demand.

In contrast, when the demand for a product is elastic, a change in price results in a relatively large change in the quantity demanded of the product. This is because consumers have a choice of substitutes, and they can switch to a substitute product if the price of the original product becomes too expensive.

For instance, let’s say that the price of a particular brand of shampoo increases. Consumers can easily switch to a substitute brand that is cheaper, and as a result, the quantity demanded of the expensive brand of shampoo will decrease significantly. This is an example of elastic demand.

Overall, understanding the concept of inelastic demand is crucial for businesses to set the right pricing strategies and forecast demand accurately. When the demand for a product is inelastic, businesses can increase their prices without fear of losing a significant portion of their customers. However, when the demand for a product is elastic, businesses must be careful not to price themselves out of the market.

Inelastic Demand Curve

An inelastic demand curve is a graphical representation of the relationship between the price of a product and the quantity demanded when the demand is inelastic.

The shape of an inelastic demand curve is relatively steep, indicating that changes in price have little effect on the quantity of the product demanded. This means that when the price of the product changes, the change in quantity demanded is relatively small.

The graph of an inelastic demand curve is usually drawn with a vertical axis for the price of the product and a horizontal axis for the quantity demanded. The curve is downward sloping but is relatively steep. This means that even a significant change in price will result in only a small change in the quantity demanded.

An example of a product with an inelastic demand curve is insulin, which is a life-saving drug for people with diabetes. When the price of insulin increases, people with diabetes are likely to continue to buy it because they need it to manage their health condition. Therefore, the quantity demanded of insulin is relatively insensitive to changes in price, resulting in an inelastic demand curve.

It’s important to note that an inelastic demand curve can be found in various products or services, and it’s not limited to any particular industry or market. The shape of the demand curve depends on the price elasticity of the product, which can vary based on several factors, including necessity, substitutes availability, and consumer behavior.

Characteristics of Inelastic Demand

Here are some common characteristics of inelastic demand:

1. Necessity: Products or services that are considered essential or necessary for consumers are more likely to have inelastic demand. This is because consumers are willing to pay almost any price for these products or services, regardless of changes in price.
2. Few substitutes: When a product or service has few substitutes or alternatives available, the demand tends to be more inelastic. This is because consumers have limited choices and must continue to purchase the product or service regardless of price changes.
3. Price sensitivity: Inelastic demand is characterized by low price sensitivity, meaning that changes in price have little effect on consumer demand. Even if the price of the product or service increases, consumers will still continue to purchase it.
4. Small proportion of income: When a product or service represents a small proportion of consumers’ income, demand tends to be more inelastic. This is because consumers are less likely to be deterred by small price changes.
5. Time: The length of time that consumers have to adjust to changes in price can also affect demand elasticity. In the short term, demand may be relatively inelastic, while in the long term, demand may become more elastic as consumers have more time to adjust their behavior and find substitutes.

How to Calculate Inelastic Demand

Inelastic demand is typically calculated using the price elasticity of demand (PED) formula, which measures the responsiveness of the quantity of a product demanded to changes in its price.

The PED formula is:

PED = percentage change in quantity demanded / percentage change in price

If the PED value is less than 1, the demand is said to be inelastic, which means that changes in price have little effect on the quantity of the product demanded.

For example, if the price of a product increases by 10%, and the quantity demanded only decreases by 2%, the PED can be calculated as follows:

PED = -2% / 10% = -0.2

Since the PED is less than 1, this indicates that the demand for the product is inelastic, meaning that consumers are relatively insensitive to changes in price.

It’s worth noting that PED can vary depending on the time period being considered. Demand may be more elastic in the long term as consumers have more time to adjust their behavior and find substitutes.

Inelastic Demand Example

An example of inelastic demand is prescription medication for a life-threatening or chronic medical condition. If the price of the medication increases, the quantity demanded is likely to remain relatively stable because the consumers of this medication are dependent on it for their health and well-being. This is because the consumers of this medication have limited options and will continue to purchase the medication, even if the price increases.

For instance, insulin, which is a life-saving drug for people with diabetes, has an inelastic demand. People with diabetes need insulin to manage their blood sugar levels, and they have no substitute for insulin. Even if the price of insulin increases, people with diabetes are likely to continue buying it to manage their health condition, resulting in little change in the quantity demanded of insulin.

Another example of inelastic demand is gasoline or petrol. People need gasoline to drive their cars and commute to work or other places, and there are relatively few substitutes available. Therefore, even if the price of gasoline increases, people are likely to continue to purchase it because they need it for their daily activities. However, the demand for gasoline may become more elastic in the long run if consumers can adjust their behavior by using public transportation, carpooling, or purchasing more fuel-efficient vehicles.

Overall, products or services with inelastic demand tend to be those that are considered essential or necessary, have few substitutes, and represent a small proportion of consumers’ income.

Inelastic Demand vs Elastic Demand

The key difference between inelastic demand and elastic demand is the responsiveness of the quantity of a product demanded to changes in its price. Inelastic demand refers to a situation where changes in the price of a product have little effect on the quantity of the product demanded. In other words, the demand is relatively insensitive to price changes. Products or services with inelastic demand are usually essential, have few substitutes, and represent a small proportion of consumers’ income. Examples include prescription medication for life-threatening or chronic medical conditions, gasoline, and utilities such as water or electricity.

On the other hand, elastic demand refers to a situation where changes in the price of a product have a significant effect on the quantity of the product demanded. Products or services with elastic demand usually have substitutes readily available and are not considered essential. Examples include luxury goods such as high-end cars, vacations, and other non-essential items.

To measure the responsiveness of demand to changes in price, economists use a metric known as the price elasticity of demand (PED). If the PED value is greater than 1, the demand is said to be elastic, meaning that changes in price have a significant effect on the quantity of the product demanded. If the PED value is less than 1, the demand is said to be inelastic, meaning that changes in price have little effect on the quantity of the product demanded.

Overall, the difference between inelastic and elastic demand lies in how sensitive consumers are to price changes, with inelastic demand being relatively insensitive to price changes, while elastic demand is highly responsive to price changes.

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