Inelastic Demand

What is Inelastic Demand?

Inelastic demand is characterized by little or no changes in the quantity sold in the event of price changes. Price increases therefore only lead to a comparatively small decrease, while price reductions do not lead to a strong increase in demand.

In this lesson we explain the different types of inelastic demand and what effects they can have on price increases and decreases. At the end of the lesson, you will find a few practice questions that you can use to check your newly acquired knowledge.

English: Unelastic demand

Why is inelastic demand important?

According to gradchem.com, knowledge of the elasticity of demand is particularly important when determining the price of goods and services.

If the elasticity of demand is known, it can be estimated beforehand whether a price increase or decrease will have the desired effect in the form of increasing or decreasing sales.

Understanding Inelastic Demand

If price increases or decreases are up for discussion, it is essential to know the elasticity of demand. This is the only way to estimate in advance how the quantity in demand will develop as a result of the price change.

In the case of inelastic demand, it is assumed that the reactions to a price change will be minor to marginal or that there will be no response at all.

An example of this is provided by essential goods such as B. water. Even with a price increase, the demand for it will hardly change.

Types of elasticity

Depending on how inelastic a demand is, different types of elasticity are distinguished from one another.

Types of elasticity:

  • completely inelastic demand
  • very inelastic demand
  • abnormally elastic demand

Inelastic demand

Inelastic demand always occurs when a price change results in a disproportionately low change in the quantity demanded.

If the price of a good is reduced minimally, this does not result in a significant increase in demand. The reasons for this lie in the lack of awareness of the price change by the customer or in the lack of substitutes.

Inelastic Demand

Inelastic demand

Completely inelastic demand

The completely inelastic demand is an extreme case in which an infinitely high price change does not cause any changes in the quantity demanded. In practice, this effect can be seen with vital drugs, for example.

Completely inelastic demand

Abnormally elastic demand

The abnormally elastic demand is a special case in this series, because a higher price also leads to a higher demand.

However, this effect is limited as it would require infinite financial resources. Goods that have this effect (also known as the snob effect ) are also referred to as Giffen goods. It is particularly common in luxury goods that are associated with a certain social status.