Inelasticity

Definition§

Inelasticity is an economic term used to describe a situation where the quantity demanded or supplied of a good or service is relatively insensitive to changes in its price. In other words, inelasticity measures how much the quantity changes in response to a price variation. If the quantity does not change significantly, it is termed inelastic.

Inelastic demand implies that consumers will buy nearly the same amount of the good or service even if the price rises. Similarly, inelastic supply implies that producers will supply nearly the same amount despite changes in the market price.

Examples§

1. Essential Goods: Goods such as basic food items (e.g., bread, milk) and gasoline are considered inelastic because people need them regardless of price fluctuations.
2. Medical Services: Healthcare services often exhibit inelastic demand since people require medical treatment regardless of cost.
3. Addictive Products: Items such as cigarettes exhibit inelastic demand because consumers find it difficult to quit despite price increases.

Frequently Asked Questions (FAQs)§

1. What factors contribute to inelasticity? Key factors include the necessity of the product, availability of substitutes, and proportion of income spent on the good.

2. Can a product be perfectly inelastic? Yes, a product is perfectly inelastic if its quantity demanded or supplied does not change at all with changes in price. However, perfectly inelastic situations are rare and often theoretical.

3. How do you determine the elasticity of a product? The elasticity can be calculated using the elasticity coefficient formula, which measures the percentage change in quantity demanded or supplied over the percentage change in price.

4. Is inelasticity the same for all products? No, inelasticity varies by product depending on consumer behavior, necessity, availability of alternatives, and other market factors.

5. How does inelasticity affect total revenue? For inelastic demand, price increases typically lead to higher total revenue, while for elastic demand, price increases may reduce total revenue.

Related Terms§

• Elasticity of Supply and Demand: Measures how the quantity demanded or supplied responds to a change in price.
• Price Elasticity of Demand (PED): The percentage change in quantity demanded resulting from a one percent change in price.
• Price Elasticity of Supply (PES): The percentage change in quantity supplied resulting from a one percent change in price.
• Cross Elasticity of Demand: Measures how the quantity demanded of one good responds to a change in price of another good.
• Income Elasticity of Demand: Measures how the quantity demanded of a good responds to changes in consumer income.

Online References§

• Investopedia: Inelasticity
• Wikipedia: Price Elasticity
• Khan Academy: Elasticity

Suggested Books for Further Studies§

1. “Principles of Microeconomics” by N. Gregory Mankiw
2. “Microeconomics: Theory and Applications with Calculus” by Jeffrey M. Perloff
3. “Price Theory and Applications” by Steven E. Landsburg
4. “Economics: Principles, Problems, and Policies” by Campbell R. McConnell and Stanley L. Brue

Fundamentals of Inelasticity: Economics Basics Quiz§

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