The inelastic demand It is a situation in which the demand for a product does not increase or decrease reciprocally with a fall or rise in its price. People buy roughly the same amount, whether the price goes down or up.
Demand is price inelastic when a percentage change in the value of the product or service causes a smaller percentage change in demand. Products that are inelastic in price tend to have few substitutes and are deemed necessary by users.
That happens with things that people must have, such as gasoline. Drivers must buy the same amount, even when the price increases. Similarly, you don't buy much more even if the price goes down. Inelastic demand is one of the three types of elasticity of demand.
This value describes how much demand changes when price changes. The other two types are: elastic demand, when the quantity demanded changes more than the price does; and unit elastic demand, when the quantity demanded changes the same as the price.
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The elasticity of demand calculation is done by dividing the percentage change in quantity demanded by the percentage change in price. The law of demand says that the amount that is bought moves inversely to the price:
Elasticity = percent change in demand / percent change in price
The elastic demand is when the elasticity ratio is greater than one. If the price fell by 10% and the quantity demanded increased by 50%, then the ratio would be 0.5 / 0.1 = 5.
If the price fell 10% and the quantity demanded did not change, then the ratio would be 0 / 0.1 = 0. This is known as completely inelastic..
Inelastic demand occurs when the relationship between quantity demanded and price is between zero (perfectly inelastic) and one elastic unit.
Five factors determine the demand for each person: price, price of substitutes, income, tastes, and expectations. For aggregate demand, the sixth factor is the number of buyers.
If you have a car, there is no alternative but to buy gasoline to fill the car's tank. By relying on the train to get to work, the rail company can raise prices with little drop in demand.
If a company has monopoly power, then it can charge higher prices. For example, prices at highway service stations tend to be higher, because consumers cannot choose where to buy food without leaving the highway.
If a product is bought infrequently (such as salt) it is less likely to be price sensitive.
If a product like salt is a small percentage of revenue, price may be less of a concern.
In the short term, demand tends to be more price inelastic. It takes time for consumers to look for alternatives.
There are two types of inelastic demand curves: perfectly inelastic demand and inelastic demand..
You can determine if demand is inelastic by looking at the demand curve. Since the quantity demanded does not change as much as the price, it will look steep. In fact, it will be a steeper curve than the elastic curve of the unit, which is diagonal.
The more inelastic the demand, the steeper the curve. If it is perfectly inelastic, then it will be a vertical line. The quantity demanded will not move, no matter what the price is.
Those with cars will need to keep buying gas to get to work.
People who smoke become addicted to this vice and are willing to pay a higher price to maintain it..
These products have no close substitutes.
Products in which companies have monopoly power, such as Apple computers, the iPhone, Microsoft Windows.
They tend to be inelastic because they are necessary for survival.
No matter how cheap bananas are, there will only be as many as can be eaten before they go bad. Ten bunches will not be bought even if the price falls by 25%.
Since ground beef can be frozen, buying a third pack is just as good as the first. The marginal utility of ground beef is high; bananas lose their consistency in the freezer, so their marginal utility is low.
There is no real life example of something with perfectly inelastic demand. If that was the case, then the supplier could charge an infinite amount and people would have to buy it..
The only thing that would come close would be if someone managed to own all the air or all the water on Earth. There is no substitute for either one; people must have air and water or they would die in a short period of time.
Even that is not perfectly inelastic. The provider could not collect 100% of the revenue in the world. People would still need some money to buy food or they would starve in a few weeks. It is difficult to imagine a situation that creates a perfectly inelastic demand.
The demand could be perfectly inelastic in the case of a unique product such as a work of art. No matter how much you are willing to pay for it, there can never be more than one original version of it.
If the price of an essential drug changed from $ 200 to $ 202 (a 1% increase) and demand changed from 1,000 units to 995 units (a decrease of less than 1%), the drug is considered an inelastic product..
For example, drivers need a certain amount of gasoline each week. Gasoline prices change every day; if there is a drop in supply, prices will skyrocket.
People will still buy gas because they cannot immediately change their driving habits. To shorten their travel time, they would have to change jobs.
You would still need to buy food at least weekly. You could go to a store that's closer if possible, but most people would tolerate higher gas prices before making such drastic changes..
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