Inelastic Demand

What is Inelastic Demand?

Inelastic demand is when the buyer’s demand does not change as much as the price changes. When the price increases by 20% and the demand decreases by only 1%, demand is said to be inelastic.

This situation typically occurs with everyday household products and services. When the price increases, people will purchase the same amount of the good or service as they did prior to the increase because their needs stay the same. A similar situation exists when there is a decrease in price as people will continue to buy the product or service.

 

 

Elasticity Formula

Elasticity = Percentage Change in Demand / Percentage Change in Price

 

For example, look at the demand and price table below

PriceQuantity of demandDemand situation
$1002000I
$902005II
$802010III
$702020IV
$502050V

 

Calculating change in demand situation I to II

 

Elasticity = ((2000 – 5)/((2000+2005)/2)) / ((90-100)/((90+100)/2))
Elasticity = -0.0949

 

This number shows that a price decrease of 1% will also increase demand by 0.0949%.

 

 

Demand Curve

There are two types of inelastic demand,

1.     Perfectly inelastic demand

2.     Inelastic demand

An example of the two types of curves are shown below:

 

Demand Elasticity and inelastic demand

 

A Note: perfectly inelastic demand is when a change in prices does not change the quantity of demand at all.

 

 

Drawing the Demand Curve Using Example Data

 

drawing inelastic demand

 

Using data from the example calculation, a demand curve is drawn by placing the price on the Y-Axis and demand on the X-Axis. The line drawn from the example’s data results in an inelastic demand curve.

 

 

Types of Elasticity of Demand

There are five types of elasticity of demand:

1.     Perfectly elastic demand

2.     Perfectly inelastic demand

3.     Unitary demand

4.     Elastic demand

5.     Inelastic demand

 

Perfect demand means that prices or quantities are fixed, and are not affected by the other variable. Unitary demand occurs when a change in price causes a proportionate change in quantity.

 

 

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