⚖️ Inelastic Demand: Demand that is not very responsive to price changes
Inelastic demand describes a situation where the quantity demanded changes very little when the price changes. This article explores the concept of price elasticity of demand, the key factors that make demand inelastic (necessities, few substitutes, addiction, short time horizon), and how businesses and governments use this knowledge. We will walk through real‑life examples, from insulin to gasoline, and even examine how a drought affects the price of potatoes. By the end, you will understand why some products never go on sale — and why you still buy them.
🧠 1. The Elasticity Scale: From Stretchy to Stiff
Imagine a rubber band. If it stretches a lot when you pull, it is elastic. If it barely moves, it is inelastic. Economists measure this “stretch” with a number called the Price Elasticity of Demand (PED). The formula is simple:
$PED = \frac{\% \ \text{change in quantity demanded}}{\% \ \text{change in price}}$
If the answer is less than 1 (ignoring the minus sign), demand is inelastic. For example, a 10% price hike might cause only a 2% drop in sales. That gives a PED of 0.2. When PED is between 0 and 1, the product is a necessity — we feel we must have it.
🛒 2. The Big Four: What Makes Demand Inelastic?
Why are we so stubborn about buying certain things? Four main reasons turn demand into steel instead of jelly.
🔹 Necessities vs. Luxuries
Medication, basic food, electricity — you cannot skip them. A luxury car or a designer handbag? You can wait or choose another brand.
🔹 Few or No Substitutes
If your car runs only on diesel, and diesel prices rise, you cannot switch to banana peels. No substitutes = captive customer.
🔹 Proportion of Income
Salt is cheap. Even if its price doubles, you spend only pennies more. Big‑ticket items like refrigerators hurt more, so demand is more elastic.
🔹 Time Horizon
Right after a price rise, you keep buying because you have no quick alternative. Over months, you might install solar panels (electricity) or buy a hybrid car (gasoline).
| Product Category | Typical PED | Elasticity Type | Why? |
|---|---|---|---|
| Insulin (diabetes) | 0.12 – 0.20 | Highly Inelastic | Life‑saving, no substitute |
| Gasoline (short run) | 0.25 – 0.30 | Inelastic | Car dependence |
| Cigarettes | 0.35 – 0.45 | Inelastic | Addiction, habit |
| Restaurant meals | 2.30 – 3.00 | Elastic | Can cook at home |
| Fresh tomatoes | 2.50 – 4.00 | Very Elastic | Many other vegetables |
💼 3. The Real World: How Governments and Firms Use Inelasticity
When demand is inelastic, sellers can raise prices and still earn more total revenue. This is a superpower — but it can also be a trap for consumers. Let's walk through two powerful stories.
🏛️ SIN TAXES Governments put heavy taxes on cigarettes and alcohol. Because demand is inelastic, the quantity bought does not fall much, so the government collects huge tax revenues — and people may smoke less over many years.
⛽ OIL COMPANIES In the short term, oil firms know drivers must fill the tank. They can increase the price per gallon, and most people will grumble but still pay. Over years, however, demand becomes more elastic.
🥔 4. Case Study: The Potato Famine That Made Farmers Richer
Here is a famous paradox. In Ireland, potatoes were the main food. A disease destroyed much of the crop, so the supply dropped and prices soared. Normally farmers would lose money because fewer people buy. But potatoes were a necessity with no substitutes — demand was inelastic. The result: farmers actually earned more total income even though they sold fewer potatoes. The price shot up so much that it over‑compensated for the lost sales. This only works when PED < 1.
📐 5. The Math Behind the Magic: Total Revenue Test
You can check if demand is inelastic with a simple trick: Total Revenue = Price × Quantity. If you raise the price and total revenue goes up, demand is inelastic. If revenue falls, it is elastic.
❓ 6. Important Questions (Asked by students just like you)
Not exactly. For drinking and basic hygiene, it is extremely inelastic. But for watering lawns or filling swimming pools, people cut back when prices rise. So even water has a little elasticity — economists call it relatively inelastic.
Yes! Time is the biggest factor. Just after a price rise, demand is often inelastic. After a year, people find substitutes, carpool, or change habits — elasticity increases. Also, new inventions (like streaming replacing cable TV) can turn a once‑inelastic good elastic.
Luxury goods often have elastic demand, but some high‑end items behave like inelastic goods because the high price itself is part of the appeal (Veblen effect). Lowering the price could actually reduce demand — the opposite of the normal law!
🧾 7. Conclusion: Why Inelastic Demand Matters Every Day
📘 8. Footnote — Terms & Abbreviations
[1] PED — Price Elasticity of Demand: a numerical measure of how responsive quantity demanded is to a price change.
[2] Total Revenue — the total money a firm receives from selling its product (Price × Quantity).
[3] Veblen good — a product for which demand increases as price increases, because of its exclusive status.
[4] Substitute — a different product that can be used in place of another (e.g., butter and margarine).