Friday, 14 July 2017

Investopedia: What is 'Inelastic'?

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.

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.
Next Up Price Elasticity Of Demand

    Price Elasticity Of Demand
    Quantity Demanded
    Total Revenue Test
    Demand Elasticity
    Tax Incidence
    Income Elasticity Of Demand
    Cross Elasticity Of Demand

Price Elasticity Of Demand
Video Definition

Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.
BREAKING DOWN 'Price Elasticity Of Demand'

Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price).
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