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💸principles of economics review

Inelasticity

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Inelasticity refers to the concept in economics where the demand or supply of a good or service is not significantly affected by changes in its price. It indicates a low responsiveness or sensitivity of quantity demanded or supplied to changes in price.

5 Must Know Facts For Your Next Test

  1. Inelastic demand or supply implies that consumers or producers are not very sensitive to price changes, often due to the lack of available substitutes or the necessity of the good or service.
  2. Goods with inelastic demand or supply tend to have a price elasticity coefficient (the ratio of the percentage change in quantity to the percentage change in price) that is less than 1 in absolute value.
  3. Inelastic demand or supply is common for essential goods and services, such as healthcare, education, and basic necessities, where consumers have a high willingness to pay.
  4. The degree of inelasticity can vary, with some goods being more inelastic than others, depending on factors like the availability of substitutes and the importance of the good or service to consumers.
  5. Understanding the concept of inelasticity is crucial in analyzing the impact of price changes on the equilibrium of a market and the distribution of the burden of taxation or subsidies.

Review Questions

  • Explain how the concept of inelasticity relates to the responsiveness of quantity demanded or supplied to changes in price.
    • Inelasticity refers to a situation where the quantity demanded or supplied of a good or service does not change significantly in response to changes in its price. This means that consumers or producers are not very sensitive to price changes, often due to the lack of available substitutes or the necessity of the good or service. Goods with inelastic demand or supply have a price elasticity coefficient (the ratio of the percentage change in quantity to the percentage change in price) that is less than 1 in absolute value, indicating a low responsiveness to price changes.
  • Describe the factors that contribute to the degree of inelasticity for a good or service.
    • The degree of inelasticity can vary depending on several factors. Goods with inelastic demand or supply are often essential goods and services, such as healthcare, education, and basic necessities, where consumers have a high willingness to pay. The availability of substitutes is another key factor, as the lack of substitutes can make demand or supply more inelastic. Additionally, the importance of the good or service to consumers and the time frame being considered can also influence the degree of inelasticity. For example, demand for gasoline may be more inelastic in the short run, as consumers have limited options to adjust their consumption, but more elastic in the long run as they can switch to more fuel-efficient vehicles.
  • Analyze the implications of inelasticity on the impact of price changes and the distribution of the burden of taxation or subsidies.
    • Understanding the concept of inelasticity is crucial in analyzing the impact of price changes on the equilibrium of a market and the distribution of the burden of taxation or subsidies. When demand or supply is inelastic, changes in price will have a smaller impact on the quantity demanded or supplied, leading to a larger change in the equilibrium price. This means that the burden of a tax or the benefits of a subsidy will be disproportionately borne by the side of the market with the more inelastic demand or supply. For example, in the case of inelastic demand, a tax on the good will result in a larger increase in the price paid by consumers, as they are less responsive to the price change, while the burden on producers will be smaller.