Perfectly Inelastic

Definition

Perfectly inelastic refers to a situation where the quantity demanded or supplied of a good or service is completely unresponsive to changes in its price. In other words, the quantity remains fixed regardless of the price level.

5 Must Know Facts For Your Next Test

1. Perfectly inelastic demand or supply means the quantity is fixed and does not change at all in response to price changes.
2. Perfectly inelastic demand has an elasticity coefficient of 0, indicating that quantity demanded does not respond to price changes.
3. Perfectly inelastic supply has an elasticity coefficient of 0, indicating that quantity supplied does not respond to price changes.
4. Perfectly inelastic goods or services are essential and have no close substitutes, such as life-saving medications or basic necessities.
5. Marginal revenue for a perfectly inelastic good is equal to the price, as each additional unit sold generates the same revenue.

Review Questions

• Explain how the concept of perfect inelasticity relates to the price elasticity of demand.
  • Perfect inelasticity refers to a situation where the quantity demanded of a good or service is completely unresponsive to changes in its price. This means the price elasticity of demand is zero, as the quantity demanded does not change at all in response to price fluctuations. Perfectly inelastic demand is an extreme case on the elasticity spectrum, where consumers have no ability or willingness to adjust their consumption regardless of the price.
• Describe the relationship between perfectly inelastic demand and marginal revenue.
  • When demand is perfectly inelastic, marginal revenue is equal to the price of the good or service. This is because each additional unit sold generates the same revenue, as the quantity demanded does not change. Unlike goods with elastic demand, where lower prices lead to higher quantities sold and decreasing marginal revenue, perfectly inelastic goods maintain the same marginal revenue regardless of the price level. This makes pricing decisions simpler for producers of perfectly inelastic goods.
• Analyze the factors that contribute to a good or service having perfectly inelastic demand or supply.
  • Goods and services with perfectly inelastic demand or supply typically share certain characteristics. They are often essential products with no close substitutes, such as life-saving medications or basic necessities like water. Consumers have an absolute need for these goods and cannot reduce their consumption, even when prices rise. On the supply side, factors like limited production capacity or government regulations can lead to perfectly inelastic supply, where quantity supplied remains fixed regardless of price changes. Understanding the unique factors behind perfect inelasticity is crucial for analyzing markets and predicting consumer and producer behavior.

Related terms

Elasticity: Elasticity measures the responsiveness of quantity demanded or supplied to changes in a determinant, such as price.

Inelastic Demand: Inelastic demand occurs when the quantity demanded changes by a smaller percentage than the percentage change in price.

Marginal Revenue: Marginal revenue is the additional revenue earned from selling one more unit of a good or service.