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What Is: Inelastic Demand

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Inelastic demand is a term used to describe one of two conditions:

  • Where a change in the price of a good or service does not significantly impact the amount of that good or service demanded
  • Where a change in the income of consumers does not sginificantly impact the amount or service demanded 

“Perfect” Versus “Imperfect” 

“Perfect” inelastic demand indicates that the price of something can change without producing any effects on the supply of and the demand for that product or service. For instance if the FDA approved Merck to release a drug that could permenantly reverse any cancer, demand for that drug would likely be “perfectly inelastic” because individuals, organizations etc. would want to buy that drug regardless of it’s price. Usually most cases of inelastic demand are “imperfect” in the sense the price changes effect only minute changes to both supply and demand

Price Versus Income

Definitions of inelastic demand change depend on whether you’re referring to the Price Elasticity of Demand (PED) or the Income Elasticity of Demand (IED). The PED model relates the demand for a product or service to the changes in its price, so inelastic demand here is when a price change doesn’t bear much weight on how much consumers want. The IED scenario relates to demand to a consumer’s income so inelastic demand would mean that rising or falling income levels would have little impact on the demand for a given product or service. While different, it is not impossible for a single product to have inelastic demand by the Price and Income models. 

Examples Of Inelastic Demand

Consumer Staples:

  • Think of items that you always check to make sure you have each time you make a trip to your local grocery store, like toilet paper, milk or bread. In general, these items have inelastic demand because regardless of how expensive they are, or how much money someone has, consumers will continue to want milk, bread, and toilet paper. Changes in price and income usually impact brand selection for consumer staples, meaning that the question isn’t, “To buy or not to buy”, it’s more often, “Which loaf, or brand of milk should I buy?”

Gasoline:

  • The price per gallon of gasoline at America’s gas stations is a fine example of inelastic demand in the Price Elasticity model. As the price per gallon changes, the demand for gasoline to fuel cars and lawn care tools doesn’t really change even when the price steadily increases over a short period. The income model doesn’t fit as well, considering that in more metropolitan areas, the presence of mass transit systems allows indviduals at lower income levels to forego purchasing gasoline for a car. 

Employment:

  • The U.S. labor markets currently are plagued by an inelastic demand problem with corporations on one end and jobseekers on the other. From an income perspective, the lingering economic malaise has exacerbated the demand for jobs across income levels as supply (the number of positions open) hasn’t increased to  offset demand adequately. From a price perspective, demand for employment could be considered inelastic (from the seeker’s point of view) since the costs involved with employment bear little weight on the desire for work. 

So Is Inelastic Demand Good or Bad?

In the case of certain goods like gasoline or milk, inelastic demand will almost always be present since these goods have become essential in one sense or another. However, consumers are left exposed to arbitrary price inflation and price gouging which have a host of negative outcomes. The California Energy Crisis of 2000-2002 is a good example, as energy companies like Enron and Reliant Energy (now GenON) exploited the inelastic demand for electricity to impose abnormally high costs to consumers for the sole purpose of increasing profits. It is for this reason that public ultities are often the most heavily regulated industries, and rightly so, because energy companies have no financial reason to dramatically increase energy costs to consumers since consumers will have to use their product. With non-commodity markets like labor, inelastic demand is also problematic. The U.S. market demonstrates the consequences of the unwillingess or inaction (on the part of the private sector) to create jobs at a rate to satisfy demand for them despite arguably favorable economic conditions.

Last Words

Inelastic demand is becoming more important to understand in regards to the lingering unemployment concerns here in the United States considering that it plays a critical role in the ability of American corporations to downsize their workforce repeatedly in the name of cost cutting. Until the government reaches an effective compromise on matters of fiscal policy and regulation, America’s jobseekers will continue to see insignificant growth in job opening and hiring rates from the private sector.

 

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About Alexander J Smith III

  • Igor

    The eager Econ student is referred to Paul Samuelsons excellent texts on Econ for understanding “Supply and Demand” (a subject that many claim there is a law for, but none tell me what it is, that elusive “law of supply and demand”).