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
- 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.
- Medical Services: Healthcare services often exhibit inelastic demand since people require medical treatment regardless of cost.
- Addictive Products: Items such as cigarettes exhibit inelastic demand because consumers find it difficult to quit despite price increases.
Frequently Asked Questions (FAQs)
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What factors contribute to inelasticity?
Key factors include the necessity of the product, availability of substitutes, and proportion of income spent on the good.
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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.
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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.
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Is inelasticity the same for all products?
No, inelasticity varies by product depending on consumer behavior, necessity, availability of alternatives, and other market factors.
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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.
- 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
Suggested Books for Further Studies
- “Principles of Microeconomics” by N. Gregory Mankiw
- “Microeconomics: Theory and Applications with Calculus” by Jeffrey M. Perloff
- “Price Theory and Applications” by Steven E. Landsburg
- “Economics: Principles, Problems, and Policies” by Campbell R. McConnell and Stanley L. Brue
Fundamentals of Inelasticity: Economics Basics Quiz
### Which type of product typically demonstrates inelastic demand?
- [x] Essential goods
- [ ] Luxury items
- [ ] Technological gadgets
- [ ] Seasonal products
> **Explanation:** Essential goods like basic food items and gasoline typically demonstrate inelastic demand because consumers need them regardless of price changes.
### Which coefficient value indicates perfectly inelastic demand?
- [ ] -1
- [x] 0
- [ ] 1
- [ ] Infinity
> **Explanation:** A coefficient value of 0 indicates perfectly inelastic demand, where quantity demanded does not change at all regardless of price changes.
### What is a common characteristic of products with inelastic supply?
- [x] Difficulty to increase production quickly
- [ ] High availability of substitutes
- [ ] High price fluctuations
- [ ] Seasonal production
> **Explanation:** Products with inelastic supply often have a difficulty in increasing production quickly, such as agricultural products or artworks.
### When demand is inelastic, how does a price increase affect total revenue?
- [x] Total revenue increases
- [ ] Total revenue decreases
- [ ] Total revenue remains the same
- [ ] Total revenue fluctuates unpredictably
> **Explanation:** When demand is inelastic, a price increase typically leads to an increase in total revenue because the quantity demanded does not drop significantly.
### What is the primary factor that contributes to inelastic demand?
- [ ] Availability of many alternatives
- [ ] High luxury tax rates
- [ ] Consumer preference for novelty
- [x] Necessity of the product
> **Explanation:** The necessity of the product is the primary factor that contributes to inelastic demand as consumers will continue to purchase it regardless of price changes.
### How does the availability of substitutes affect elasticity?
- [ ] It increases inelasticity
- [ ] It decreases inelasticity
- [x] It increases elasticity
- [ ] It has no effect on elasticity
> **Explanation:** The availability of substitutes increases elasticity because consumers can easily switch to alternative products if the price of the original product rises.
### Which measurement shows how quantity demanded changes with consumer income?
- [ ] Price Elasticity of Demand (PED)
- [ ] Cross Elasticity of Demand
- [x] Income Elasticity of Demand
- [ ] Supply Elasticity
> **Explanation:** Income Elasticity of Demand measures how the quantity demanded of a good responds to changes in consumer income.
### What type of elasticity is demonstrated when the quantity supplied changes significantly due to a price change?
- [x] Elastic supply
- [ ] Inelastic supply
- [ ] Unit elastic supply
- [ ] Perfectly inelastic supply
> **Explanation:** Elastic supply is characterized by significant changes in quantity supplied due to price changes.
### Which of the following goods is likely to have inelastic demand?
- [x] Insulin for diabetics
- [ ] Gourmet chocolate
- [ ] Digital cameras
- [ ] Luxury cars
> **Explanation:** Insulin for diabetics is likely to have inelastic demand because it is a necessary medication that consumers will buy regardless of price.
### In microeconomic theory, which term best describes the responsiveness of quantity demanded to price changes?
- [x] Elasticity
- [ ] Surplus
- [ ] Scarcity
- [ ] Utility
> **Explanation:** Elasticity best describes the responsiveness of quantity demanded to price changes, encompassing both inelastic and elastic responses.
Thank you for exploring the concept of inelasticity with us and testing your understanding through our quiz. Enhance your mastery of economic principles with further reading and practice!
