key term - Perfectly Inelastic Demand

Definition

Perfectly inelastic demand refers to a scenario where the quantity demanded of a good or service does not change at all in response to changes in its price. Regardless of the price, the quantity demanded remains fixed, exhibiting zero price elasticity of demand.

5 Must Know Facts For Your Next Test

1. Perfectly inelastic demand is represented by a vertical demand curve, indicating that quantity demanded does not change at all in response to price changes.
2. Goods and services with perfectly inelastic demand tend to be necessities with no close substitutes, such as insulin for diabetics or water in certain regions.
3. The price elasticity of demand for a perfectly inelastic good is equal to 0, meaning the percent change in quantity demanded is 0 for any percent change in price.
4. Perfectly inelastic demand is one of the two polar cases of elasticity, the other being perfectly elastic demand where quantity demanded is infinitely responsive to price.
5. Constant elasticity models, such as the constant elasticity of substitution (CES) production function, assume that the price elasticity of demand remains fixed regardless of the price level.

Review Questions

• Explain how perfectly inelastic demand relates to the concept of price elasticity of demand.
  • Perfectly inelastic demand represents the extreme case where the price elasticity of demand is equal to 0. This means that the quantity demanded of the good does not change at all in response to changes in its price. The demand curve for a perfectly inelastic good is a vertical line, indicating that consumers will buy the same quantity regardless of the price. This contrasts with perfectly elastic demand, where the price elasticity is infinite and quantity demanded is infinitely responsive to price changes.
• Describe the characteristics of goods and services that exhibit perfectly inelastic demand.
  • Goods and services with perfectly inelastic demand are typically necessities with no close substitutes. Examples include insulin for diabetics, water in certain regions, and electricity in the short run. These are products for which consumers have no choice but to purchase a fixed quantity, regardless of the price. The demand for these goods is completely unresponsive to price changes, making the price elasticity of demand equal to 0. Factors such as the lack of substitutes and the essential nature of the good contribute to this perfectly inelastic demand.
• Analyze how the concept of perfectly inelastic demand relates to the broader topic of constant elasticity models in economics.
  • Perfectly inelastic demand is one of the two polar cases of price elasticity, the other being perfectly elastic demand. These polar cases are important in the study of constant elasticity models, such as the constant elasticity of substitution (CES) production function. Constant elasticity models assume that the price elasticity of demand remains fixed regardless of the price level, unlike models with variable elasticity. Perfectly inelastic demand, with its price elasticity of 0, represents the extreme case where quantity demanded is completely unresponsive to price changes. This concept is a key component in understanding the properties and applications of constant elasticity models in economic analysis.

Related terms

Price Elasticity of Demand:

The measure of how responsive the quantity demanded is to a change in the good's price, calculated as the percent change in quantity divided by the percent change in price.

Constant Elasticity:

A situation where the price elasticity of demand remains the same regardless of the price level, resulting in a linear demand curve on a log-log graph.

Polar Cases of Elasticity: The two extreme cases of price elasticity - perfectly elastic demand and perfectly inelastic demand, where quantity demanded is either infinitely responsive or completely unresponsive to price changes.