What is Inelastic?
Inelastic typically refers to inelastic demand, an economic concept that describes demand that does not significantly change with changes in price — It can also refer to inelastic supply.
In economics, supply and demand tend to relate to the price of a good or service. Two types of demand explain how the demand for a good reacts to changes in price. Inelastic demand describes demand for a product that does not significantly change when the price changes. If the price of a product increases, consumers won’t reduce their purchases of it. Similarly, if costs fall, demand remains relatively the same. This is the opposite of elastic demand, which describes consumer desire that rises when prices drop, and that decreases when prices increase. The concept of elasticity and inelasticity also applies to supply.
Most inelastic goods are necessities. For example, everyone needs food, water, and shelter to survive. If the price of staple foods like rice increases, then people will not reduce their purchases of them. Instead, they would reduce spending elsewhere to come up with the money they need to eat. Similarly, people wouldn’t start eating significantly more rice if rice prices fell. They’d most likely continue to consume it at the same rate, and use the extra savings for something else.
Inelastic demand is like a paperclip…
If you use a rubber band to hold a pile of cards or sheets of paper together, you can stretch the band easily to accommodate more paper or cards. Paperclips are less flexible. You can extend a paperclip slightly to account for the number of sheets it needs to hold together, but they are far less flexible overall. Inelasticity is similar. Demand for an inelastic good can change, but the change is considerably smaller than that of an elastic product, which works more like a rubber band.
Inelastic is an economic term that describes certain types of goods. The demand for inelastic products does not significantly change as the price of those goods changes.
Typically, supply, demand, and price all affect each other. You can see the effects of changes in price on supply and demand by looking at a supply and demand curve. Usually, when the cost of a good or service rises, the desire for that good falls. If the price falls, demand increases.
But, when demand or supply is inelastic, this relationship is less pronounced. The curve for a perfectly inelastic product would be a vertical line (where demand is the same regardless of price.)
Inelastic can also refer to the supply of a good or service. Usually, if prices rise, businesses produce more of a good or service, increasing its supply. For a product with inelastic supply, the amount supplied does not significantly change as the price of an item rises or falls.
Typically, inelastic describes goods where the change in demand or supply is smaller than the difference in the price of the goods. For example, a good with elastic demand might have their demand increase by 2% for every 1% decrease in cost. Inelastic products are the opposite, with demand rising only by 1% for every 2% drop in price.
Many factors contribute to demand inelasticity, so the types of goods that exhibit inelasticity vary widely.
One example of a good with demand inelasticity is cigarettes. Most people who smoke cigarettes experience addiction to nicotine. The addiction encourages them to continue purchasing cigarettes, even if the cost of tobacco products rises. Similarly, if the price of cigarettes decreases, smokers are unlikely to significantly increase the amount they smoke, and non-smokers probably won’t take up the habit just because prices got cheaper.
Goods with no reasonable substitutes also commonly exhibit demand inelasticity. For example, table salt has no alternative that consumers can use as a substitute. Demand for salt will generally remain roughly the same regardless of how its price changes.
Inelastic supply refers to goods where the level of supply will not significantly change as prices change. Usually, these are goods where it is hard to add or subtract to the supply, or suppliers are operating at nearly full capacity.
One example of a good with inelastic supply is housing. If housing prices increase, it is difficult and time consuming for businesses to build more homes or for landlords to find more properties to rent. At the same time, if rents drop, landlords can’t demolish their properties to avoid the cost of owning real estate, so they’ll continue to supply a similar amount of housing at a lower price.
Another example of a good with inelastic supply is electricity. It takes a long time for a utility company to construct a new generating station. Even if the demand for energy increases, it usually takes years for governments to approve construction and for construction companies to finish building a new power station. Similarly, if demand for power falls, it can be difficult for a utility company to reduce the amount of electricity it generates.
Tickets for professional sports also have relatively inelastic supply. Most stadiums have a set number of seats, and the team offers the same amount of tickets for every game. Teams may add or remove seats over time, but this usually requires construction that takes time, making it difficult to react to changes in price quickly.
Elastic and inelastic are two ends of the spectrum when it comes to describing how price affects supply and demand.
Inelastic demand means that consumer demand for a product won’t change much if the price of that product rises or falls. Elastic demand means that consumer demand is significantly affected by changes in price. Rising prices result in lower demand. Lower prices lead to higher demand.
Elasticity is a spectrum rather than a yes or no question. Two goods can exhibit price inelasticity, but one may show this inelasticity to a greater extent. Similarly, two products might show price elasticity of demand, but one may be more affected by price changes than the other.
Economists use elasticity coefficients to describe the amount that supply or demand changes based on changes in price. If the elasticity coefficient for a product is higher than one, economists usually consider that good to have elastic demand. If the coefficient is less than one, it indicates inelastic demand. If the elasticity coefficient for a good is precisely equal to one, then the demand is unit elastic. This means that the change in demand for a good will exactly equal its difference in price.
The formula for finding the elasticity coefficient is:
% change in demand / % change in price = elasticity coefficient
When economists examine the supply and demand for a good, they often look at supply and demand curves. Supply and demand curves are graphs that show where supply, demand, and price for a product intersect.
An inelastic demand curve is one that shows the inelasticity of a good or service. If you look at the curve, you can see that the demand for the product doesn’t change much as you move along the axis that indicates the price of a good. For example, a 5% increase in the price of a good with an inelastic demand curve might only decrease demand by 2%.
The elasticity coefficient of a good determines the slope of its demand curve. If demand is on the X-axis and price on the Y-axis, goods with high demand elasticity have shallower slopes than products with low demand elasticity.
A perfectly inelastic good is a good that shows no change in either supply or demand when the price changes. The supply or demand curve of a perfectly inelastic good is a straight line. Regardless of the price of a product, demand, or supply remain the same.
In reality, no product exhibits a perfectly inelastic supply or demand. If there were a good with perfectly inelastic demand, suppliers could charge as much as they want to with guaranteed sales, or consumers could take a product from suppliers for free.
Even a staple, such as housing, has some elasticity. If prices rise too high, some consumers will find alternate living arrangements or be unable to purchase or rent a home.
If a business operates at full capacity to produce a product, it will eventually invest capital in expanding to create more supply, even if it takes some time for the additional product to reach the market.
Elasticity of demand is the opposite of inelasticity of demand. Just as inelastic products show little change in market size with changes in price, elastic goods show substantial differences in demands with changes in price.
Many luxury goods exhibit elasticity of demand. Consumers don’t need to purchase them, so the prices of these goods profoundly impact consumer demand. For example, sports tickets might exhibit high elasticity of demand. If costs rise too much, people will stop going to games. If prices fall, more consumers will be willing to pay the price.
Typically, the change in demand for an elastic good is more significant than the difference in price. For example, a good with elasticity of demand might experience a 5% increase in demand following a 1% price drop. It could also see a 5% decrease in demand after a 1% price increase.
What is Elasticity?
What is Price Elasticity?
What is the Law of Supply and Demand?
What is Revenue?
What is Income?
What is the Cost of Goods Sold?
What is Profit?
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