Inelastic refers to a situation where the quantity demanded or supplied of a good or service is not highly responsive to changes in its price. This means that a change in price will result in a relatively smaller change in the quantity demanded or supplied.
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Inelastic demand or supply means that the quantity demanded or supplied changes by a smaller percentage than the price change.
Goods with inelastic demand or supply tend to have few close substitutes, are necessities, or have a time lag in production or consumption adjustments.
The price elasticity of demand or supply is measured as the percent change in quantity divided by the percent change in price.
Inelastic demand or supply has a price elasticity value less than 1, indicating a less than proportional change in quantity to a price change.
Understanding the degree of elasticity is crucial for businesses to set optimal prices and for governments to assess the impact of taxes or subsidies.
Review Questions
Explain how the concept of inelasticity relates to the price elasticity of demand.
The price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price. When demand is inelastic, it means that the quantity demanded changes by a smaller percentage than the price change. For example, if the price of a good increases by 10%, but the quantity demanded only decreases by 5%, the demand for that good is considered inelastic. This is because consumers are not very sensitive to the price change and continue to purchase the good despite the higher price.
Describe the characteristics of goods and services that tend to have inelastic demand or supply.
Goods and services with inelastic demand or supply typically share certain characteristics. Goods with inelastic demand are often necessities, have few close substitutes, or have a time lag in adjusting consumption patterns. Examples include essential medicines, basic food items, and fuel for transportation. Goods with inelastic supply may have production processes that are constrained by factors like land, capital, or technology, or have a time lag in adjusting supply. Examples include agricultural products, certain natural resources, and specialized labor. Understanding these characteristics can help predict the degree of elasticity for different markets.
Analyze the implications of inelastic demand or supply for businesses and governments in terms of pricing and policy decisions.
The degree of elasticity has significant implications for businesses and governments. For businesses, understanding inelastic demand or supply allows them to set optimal prices that maximize revenue. If demand is inelastic, businesses can raise prices without experiencing a large drop in sales, enabling them to increase profits. Conversely, if supply is inelastic, businesses may face challenges in meeting demand and may need to adjust their pricing strategies accordingly. For governments, the elasticity of demand or supply is crucial in assessing the impact of taxes or subsidies. If demand or supply is inelastic, the burden of a tax or the benefits of a subsidy will be borne more by consumers or producers, respectively, rather than being shared evenly. This knowledge helps policymakers design more effective fiscal policies.