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Inelastic Demand

Updated on January 29, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What is Inelastic Demand?

Inelastic demand is when the change in the price of a product or service does not cause a proportional or significant change in its demand in the economy. It refers to a type of elasticity of demand.

Simply put, it points to the demand that cannot be influenced by changing prices. Price can increase or decrease, but the demand remains relatively the same. One of the simple examples is electricity, an increase in its price will not cause people to reduce their consumption level, and a decrease in its price will not make people use more.

Key Takeaways

  • Inelastic demand in economics refers to the phenomenon of insignificant or no change in demand in reaction to the change in the price of a product.
  • Examples include the demand for necessities like gasoline, electricity, water, and food staples.
  • If the price elasticity of demand is greater than one, then it is elastic. Whereas if it is less than one, then it is inelastic.
  • A flatter demand curve is a characteristic of an elastic product. In contrast, a vertical curve indicates a perfectly inelastic product, and a steeper curve indicates an inelastic product. 

Inelastic Demand Explained

Inelastic demand is associated with necessary goods like water, fuel, and electricity; since these are part of daily lives, the level and pattern of their consumption do not align with the price change.

The formula for price elasticity of demand is used to determine whether the product has inelastic demand or not.

Price elasticity of demand = % change in quantity demanded ÷ % change in price

Suppose the numerical value of price elasticity of demand derived by applying input values to the above formula is less than 1. In that case, the product is more inelastic, and if it is greater than one, the demand for a product is elastic. When it is less than one, it implies that the percentage change in price will only cause a small change in the quantity demanded. Furthermore, profit is optimized if the price elasticity is equal to one.

To find the income elasticity of demand, using the above formula, % change in income is applied instead of % change in price. For inelastic products, it will be zero or low in value. It implies that the quantity demanded will not rise or fall with an increase or decrease in income. Again, necessary or normal goods exhibit zero or low-income elasticity of demand.

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Inelastic Demand Curve/Graph

Drawing a demand curve helps understand the different types of elasticity of demand and add points to the elastic vs. inelastic vs. perfectly inelastic demand scenario.

Elastic vs inelastic vs perfectly inelastic demand curve

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Source: Inelastic Demand (wallstreetmojo.com)

  • Perfectly inelastic: When the demand remains constant despite price fluctuations, it showcases a demand curve perpendicular to the x-axis representing the quantity. A demand curve in the form of a perpendicular line indicates that the product or service is perfectly inelastic. It also discloses that the slope is zero since the perfectly inelastic demand curve is a vertical line.
  • Inelastic: Suppose a significant price change can cause a small change in the quantity demanded. In that case, the demand curve will not be vertical or perpendicular but steeper or almost perpendicular and have a greater slope.
  • Elastic: If the product is elastic, the price change fairly influences the quantity demanded. The demand curve will be flatter and have a smaller slope.

So, a vertical demand curve is attributed to a perfectly inelastic product. At the same time, a steeper curve discloses that the product has a lower price elasticity of demand. Conversely, a flatter curve indicates the greater price elasticity of demand.

Example

When Gasoline price increases, normally, there would not be a corresponding or significant decrease in the number of miles driven. Because of the inelastic nature of gasoline, the amount of gas people use is not negatively impacted by its price. Also, the common masses do not have many alternatives to travel to the workplace, transport their children, etc. Hence, the government must find a solution to reduce the price to ease the situation.

In the United States, in March 2022, the Biden administration announced the plan to release 1 million barrels of oil per day from petroleum reserve to increase the production of gasoline and a reduction in its price rise caused by Russia’s invasion of Ukraine. It is because the increased supply of a product can reduce the price. However, the increase in supply and reduction in price depends on the amount of oil released.

Frequently Asked Questions (FAQs)

What is perfectly inelastic demand?

It occurs when a price change causes no change in the quantity demanded. The perfectly inelastic demand curve is a line perpendicular to the x-axis denoting the demand.

What are inelastic demand examples?

Examples are generally discernable from the necessary goods like food staples, water, fuel, and electricity. Although these are integral elements in everyday lives, and consumers need these products and services in a reasonable quantity, an increase or decrease in their price will not make them consume more or less. For example, a high drop in the electricity price will not trigger people to use more electricity.

What is elastic vs. inelastic demand?

Elastic demand is associated with elastic products where the quantity demanded is sensitive to price changes. Therefore, the demand curve for elastic products is flatter and will have a smaller slope. Whereas for inelastic products, the quantity remains relatively constant and will have a steeper curve and larger slope. Examples of elastic products are clothing and electronics, and inelastic products are gasoline and electricity.

This has been Guide to Inelastic Demand and its meaning. We explain how this concept works with graphs/curves and examples. You may also have a look at the following articles to learn more –

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