key term - Perfectly inelastic demand

Definition

Perfectly inelastic demand refers to a situation where the quantity demanded of a good remains constant, regardless of any changes in its price. This type of demand indicates that consumers will purchase the same amount of the good no matter how much it costs, highlighting the essential nature of the product, often seen in goods that are necessities with no close substitutes.

5 Must Know Facts For Your Next Test

1. Perfectly inelastic demand is represented by a vertical demand curve on a graph, indicating that quantity demanded does not change with price fluctuations.
2. Examples of products with perfectly inelastic demand include life-saving medications or essential goods like water and basic food items.
3. In situations of perfectly inelastic demand, total revenue will always increase when prices rise, as consumers will still buy the same quantity regardless of price changes.
4. The concept of perfectly inelastic demand is more theoretical than practical, as very few goods achieve this status; however, it serves as an important benchmark in understanding consumer behavior.
5. Price elasticity of demand is measured using the formula: Price Elasticity = % Change in Quantity Demanded / % Change in Price; for perfectly inelastic demand, this elasticity equals 0.

Review Questions

• How does perfectly inelastic demand differ from inelastic demand, and what implications does this have for pricing strategies?
  • Perfectly inelastic demand signifies that quantity demanded remains unchanged regardless of price alterations, whereas inelastic demand indicates some degree of responsiveness to price changes. This distinction is crucial for pricing strategies because firms with products exhibiting perfectly inelastic demand can raise prices without worrying about losing sales volume, leading to increased revenue. In contrast, for products with merely inelastic demand, raising prices may lead to a decrease in quantity sold, thus necessitating careful consideration of price increases.
• What are some real-world examples of goods that exhibit perfectly inelastic demand, and how do these examples illustrate the concept?
  • Goods such as life-saving drugs for chronic illnesses or basic necessities like insulin for diabetics serve as prime examples of perfectly inelastic demand. For these products, consumers require them regardless of price changes because they are essential for survival or health. This illustrates the concept by showing that consumers will prioritize purchasing these goods even at significantly higher prices since there are no alternatives available and their need remains constant.
• Evaluate the potential economic implications if a significant number of goods experienced perfectly inelastic demand within a market economy.
  • If a large number of goods exhibited perfectly inelastic demand, it could lead to increased market power for producers and potentially higher prices across essential goods. Consumers would have little choice but to pay these prices due to their necessity. This scenario might create disparities in affordability among different income groups, potentially leading to social unrest. Additionally, it could limit competition and innovation within markets as producers may become complacent knowing that their sales volume will remain unaffected by price increases.

Related terms

inelastic demand:

A type of demand where consumers are relatively unresponsive to price changes, resulting in a less than proportional change in quantity demanded.

substitutes: Products or services that can replace each other; when the price of one rises, consumers may switch to the other.

necessities:

Essential goods or services that consumers cannot do without, often leading to perfectly inelastic demand.