What is ‘Inelastic’
Inelastic is an economic term used to describe the situation in which the quantity demanded or supplied of a good or service is unaffected when the price of that good or service changes. Inelastic means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.
BREAKING DOWN ‘Inelastic’
Inelastic means that a 1% change in the price of a good or service has less than a 1% change on the quantity demanded or supplied. For example, if the price of an essential medication changed from $200 to $202, a 1% increase, and demand changed from 1,000 units to 995 units, a less than 1% decrease, the medication would be considered an inelastic good. If the price increase had no impact whatsoever on the quantity demanded, the medication would be considered perfectly inelastic. Basic necessities and medical treatments tend to be relatively inelastic because they are needed for survival, whereas luxury goods, such as cruises and sports cars, tend to be relatively elastic.
The demand curve for a perfectly inelastic good is depicted as a vertical line in graphical presentations, because the quantity demanded is the same at any price. Supply could be perfectly inelastic in the case of a unique good such as a work of art. No matter how much consumers are willing to pay for it, there can never be more than one original version of it.
Elasticity of Demand
By way of contrast, an elastic good or service is one for which a 1% price change causes more than a 1% change in the quantity demanded or supplied. Most goods and services are elastic because they are not unique, but have substitutes. If the price of a plane ticket increases, fewer people will fly. A good would need to have numerous substitutes to experience perfectly elastic demand. A perfectly elastic demand curve is depicted as a horizontal line, because any change in price causes an infinite change in quantity demanded.
The inelasticity of a good or service plays a major role in determining a seller’s output. For instance, if a smartphone producer knows that lowering the price of its newest product by 5% will result in a 10% increase in sales, the decision to lower prices could be profitable. However, if lowering smartphone prices by 5% only results in a 3% increase in sales, then it is unlikely that the decision would be profitable.