Differences Between Elastic and Inelastic Demand
Elastic demand refers to the adverse change in the quantity of a product on account of the minute changes in the price of that particular product and it denotes how demand and supply respond to each other due to price, income levels, etc whereas inelastic demand signifies the demand for a particular product or service that remains constant and remains unaffected with the changes in price.
In economics two of the most basic terms are supply and demand and the entire subject revolves around them. In this article, we will discuss one type of classification of demand, namely elastic demand and inelastic demand. This type of classification is based on the elasticity of demand which refers to how the demand reacts to a change in another factor which can be price, income level, or any other substitute available. However, the price is the most commonly used factor used to illustrate elasticity and as such we will also use it for this article. The measure of elasticity of demand based on price is called price elasticity which is determined by dividing the percentage change in quantity (∆Q/Q) by percentage change in price (∆P/P) which is represented as
Elastic demand for a product is a situation in which a slight change in the price of the product will lead to an appreciable change in the demand for the product and such a scenario is observed when there is a substitute. Let us take the example of tea and coffee where both are the substitute for each other. Say, people prefer coffee over tea when the price of coffee is lower than that of tea. However, as the price of coffee increases more and more people start to shift to tea and vice versa. This situation is a perfect example of an elastic demand for a product. The price elasticity of demand for the elastic product is more than equal to one as the percentage change in demand is greater than the percentage change in price.
Inelastic demand for a product is a situation in which any significant change in the price of the product doesn’t result in any appreciable change in the demand for the product and such a scenario is observed when there is no or very few good substitutes for the product. Let us take the example of gasoline/petrol which is one of the best example of inelastic demand.
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Now when the price of gasoline increases, the impact on the demand for gasoline is insignificant as it doesn’t decline much. This is due to the fact that there are very few good substitutes for gasoline and as such consumers have to buy the gasoline even at relatively higher prices. This situation is an example of an inelastic demand for a product. The price elasticity of demand for the inelastic product is less than one as the percentage change in demand is less than the percentage change in price.
Elastic vs Inelastic Demand Infographics
Let’s see the top differences between elastic vs inelastic demand.
- In the case of elastic demand, the demand remains very volatile and changes significantly with the change in price, while in the case of inelastic, the demand is very sticky and doesn’t exhibit the appreciable change in response to price change.
- In the case of elastic demand, there is a substitute easily available while that is not the case when it comes to inelastic demand. Substitute provides the option to switch whenever the price changes.
- Also, the necessity of a person defines what the type of demand is. A luxury item is part of the elastic demand, while a necessary item forms part of inelastic demand. People are ready to pay higher prices for the necessary item.
- In the case of elastic demand, price and total revenue move in opposite direction i.e. since the decline in demand is greater than the increase in price which would result in lower revenue (= Price * Demand) and vice versa. While in the case of inelastic demand, both move in the same direction i.e. since the decline in demand is lower than the increase in price which would result in increased revenue and vice versa.
Elastic vs Inelastic Demand Comparative Table
|Basis for Comparison||Elastic Demand||Inelastic Demand|
|Meaning||It is the type of product demand which experiences significant change when there is any slight change in the price of the product||It is the type of product demand which is quite sluggish/sticky to a change in the price of the product|
|Elasticity Quotient||More than equal to one as the change in quantity demanded is greater than the change in price||Less than one as the change in quantity demanded is less than the change in price|
|Curve||The shape of the curve is slightly flatter||The shape of the curve is relatively steeper|
|Availability of Substitute||Very easily available||Few to no substitute available|
|Increase in Price||The decrease in total revenue||Increase in total revenue|
|Decrease in Price||Increase in total revenue||A decrease in total revenue|
|Nature of Products||It is applicable for products in the luxury and comfort segment||It is applicable for necessary products|
|Consumer Behaviour||More sensitive to the price change of products||Less sensitive to the price change of products|
|Customer Profile||Customer from lower income group||Customer from a higher-income group.|
The elasticity of demand is a metric to measure the impact of variation of the price of a product on the quantity demanded by consumers. The products with no or few substitutes exhibit inelastic demand while the products with an easily available large number of substitutes display an elastic demand since the consumers have the option to switch to other substitutes when there is any change in the price of the product. Also, the necessary product segment will exhibit inelastic demand while luxury and comfort products will have demand which is elastic in nature. Hence, it can be said that the primary driver of the elasticity of demand is the availability of substitutes and the necessity of the product for the survival of the population.
This has been a guide to Elastic vs Inelastic Demand. Here we discuss the top differences between them with infographics and comparative table. You may also have a look at the following articles –