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Inelastic Demand - Economics Help

The document discusses the concept of inelastic demand, which occurs when a change in price causes a smaller percentage change in demand. Goods with inelastic demand tend to have few substitutes and be considered necessities. Examples given include petrol, cigarettes, salt, chocolate, and goods where firms have monopoly power. Factors that can make demand inelastic include lack of substitutes, lack of competition, infrequent purchases, goods being a small percentage of income, and location advantages.

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Allan Jongwe
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58 views

Inelastic Demand - Economics Help

The document discusses the concept of inelastic demand, which occurs when a change in price causes a smaller percentage change in demand. Goods with inelastic demand tend to have few substitutes and be considered necessities. Examples given include petrol, cigarettes, salt, chocolate, and goods where firms have monopoly power. Factors that can make demand inelastic include lack of substitutes, lack of competition, infrequent purchases, goods being a small percentage of income, and location advantages.

Uploaded by

Allan Jongwe
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Inelastic demand
26 September 2019 by Tejvan Pettinger

Definition – Demand is price inelastic when a change in price


causes a smaller percentage change in demand. It occurs where
there is a price elasticity of demand (PED) of less than one.

Goods which are price inelastic tend to have few substitutes and
are considered necessities by users.

Diagram of price inelastic demand


For example, in the above case price rises 40% ($10 to $14 –
4/10)

Quantity demanded falls 10%.

Therefore PED = -10/40 = -0.25

Examples of inelastic demand

Petrol – those with cars will need to buy petrol to get to work
Cigarettes – People who smoke become addicted so willing to
pay a higher price
Salt – no close substitutes
Chocolate – no close substitutes
Goods where firms have monopoly power. For example, Apple
computers, iPhone, Microsoft Windows, rail fares for
commuters.
Water – when you are in the desert and very thirsty (but not if
you are in England!)

Factors that make demand inelastic

No substitutes. If you have a car, there is no alternative but to


buy petrol to fill up the car. If you rely on the train to get to
work, the train firm can increase prices with little fall in demand.
Little competition. If a firm has monopoly power then it is able
to charge higher prices. For example, prices on motorway
service stations tend to be higher, because consumers can’t
choose where to buy food, without leaving the motorway.
Bought infrequently. If you buy a good infrequently, such as
salt, you are less likely to be sensitive to price.
A small percentage of income. A good like salt is a small
percentage of income, therefore you will tend to be less
concerned about price.
Short-run. In the short-run, demand tends to be more price
inelastic. It takes time for consumers to look for alternatives.
Location. If you have the best location, then demand will be
more inelastic. Hotels with great sea view can charge more than

one in the suburbs.

Impact of Tax on inelastic demand


A tax will shift the supply curve to the left, leading to a higher
price and a fall in demand.
If demand is inelastic, then the tax will have the effect of raising
the price significantly and reducing quantity only slightly. This
will help to increase tax revenue for the government.
Most of the tax will be borne by consumers. (The consumer
burden is 80*4= $320) (The producer burden is 2*80=$160)
Cigarettes tend to have inelastic demand; when the government
increases a tax, firms are usually able to pass the whole increase
onto consumers.

Example – effect of tax on cigarettes 

Inelastic demand and revenue


If demand is price inelastic, then firms will increase revenue
from raising the price.
If the price of train fares increases from £30 to £40 (33.3%).
And demand falls from 1,000 to 980. (-2%)
The PED = -2/33 = – 0.06
Revenue was £30  x 1,000 = £30,000
Revenue is now was £40 x 980 = £39,200

Other types of inelastic demand

We can also talk about interest inelastic demand. This is the


same concept but examines how sensitive demand for
investment is to changes in the interest rate.


In this case, a cut in interest rates from 5% to 0.5% has only
caused a small increase in investment, showing that demand for
investment is interest inelastic.
Price elastic demand

The opposite of inelastic demand is elastic demand. If demand


is price elastic – an increase in price causes a bigger % fall in
demand.

If demand is elastic. It means consumers are more sensitive to


changes in prices. Therefore, an increase in tax will cause a big
fall in demand, and the price will rise only slightly. Therefore, the
government will see a fall in tax revenue. Also, if demand is
price elastic, the consumer burden will be smaller than if
demand is inelastic.

When demand is price elastic, most of the tax rise is borne by 


the producer burden.

Related
Price elasticity of demand
Examples of elasticity
What explains the volatility of food?

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11 thoughts on “Inelastic demand”

akbar hussain
14 October 2008 at 2:03 pm

hi this is akbar.i want to know about fully knowledge in elasticity


and inelasticity in economics.

Reply

OPOLOT JOHN ROBERT


19 November 2017 at 6:36 pm

THANK you

Reply

Akatukunda joshua
26 August 2018 at 10:33 am
Explanation… Well represented

Reply

Christina Athieng
10 March 2021 at 1:44 pm

when a good is a necessity the customer can not do a way with


it’s meaning that when it price increase it’s degree of
responsiveness is inelastic , how ever car which is luxury
demand is more expensive than water which is a necessity to
man, examine the cause to this reality

Reply

Jessica
28 August 2020 at 2:03 pm

Thank you! You gave me just enough info to inspire my written


assignment. Most of my classmates chose gasoline. I chose salt.

Reply

Jeff
29 August 2020 at 9:30 pm


What about coffee and crack cocaine?

Reply
Tejvan Pettinger
31 August 2020 at 8:53 am

Yes. Demand is likely to be inelastic for those.

Reply

Johnson Nyabuto
13 June 2021 at 10:35 am

I’d love to hear about cocaine and heroin too. Due to the effect
of addiction, can we say their demand is inelastic

Reply

Edward
15 October 2020 at 11:13 pm

Another inelastic product is toilet paper, can finish until the


paperwork is done 🙂
Reply


Sonia
22 April 2021 at 1:07 pm
Elastic demand usually have substitute. For example,
pizza,hamburger, etc. Or other examples like (Loya milk,peak
milk, Miksi milk).

Inelastic demand usually don’t have a close substitute. For


example, we have petrol, salt etc.

Reply

Sanchita Agarwal
27 September 2021 at 6:03 pm

If the substitutes for inelastic demand increases, how will it


affect the elasticity?

Reply

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