Elastic vs Inelastic Demand

Elastic demand refers to the adverse change in the quantity of a product on account of the minute changes in the price of that particular product. It denotes how demand and supply respond to each other due to cost, income levels, etc. In contrast, inelastic demand signifies the demand for a particular product or service that remains constant and unaffected by changes in price.

In Economics, two of the most basic terms are supply and demand. The entire subject revolves around them. This article will discuss one classification of demand, namely, elastic demand and inelastic demand. This type of classification is based on the elasticity of demand, which refers to how the demand reacts to a change in another factor: price, income level, or any other substitute available. However, the price is the most commonly used factor used to illustrate elasticity, and as such, we will also use it for this article. The measure of elasticity of demand based on price is called price elasticity which is determined by dividing the percentage change in quantity (∆Q/Q) by the percentage change in price (∆P/P), which is represented as: -

Elastic demand for a product is a situation in which a slight change in the product's price will lead to an appreciable difference in the demand for the product. Such a scenario is observed when there is a substitute. Let us take the example of tea and coffee, where both are the substitute for each other. People prefer coffee over tea when the price of coffee is lower than that of tea. However, as the cost of coffee increases, more and more people divert towards tea and vice versa. This situation is a perfect example of an elastic demand for a product. The price elasticity of demand for the elastic product is more than equal to one as the percentage change in demand is greater than the percentage change in price.

Inelastic demand for a product is when any significant change in the product's price does not result in any appreciable difference in the demand for the product. Such a scenario is observed when few or very few good substitutes for the product. Let us take the example of gasoline/petrol, one of the best example of inelastic demand.

Now, when gasoline prices increase, the impact on the gasoline demand is insignificant as it does not decline much. However, since there are very few good gasoline substitutes, consumers have to buy the gasoline even at relatively higher prices. This situation is an example of inelastic demand for a product. Therefore, the price elasticity of demand for the inelastic product is less than one as the percentage change in demand is less than the percentage change in price.

Let us see the top differences between elastic demand and inelastic demand: -

• In the case of elastic demand, the demand remains very volatile and changes significantly with the price change. While in the case of inelastic, the demand is very sticky and does not exhibit an appreciable difference in response to price change.
• In the case of elastic demand, there is a substitute easily available. In contrast, that is not the case for inelastic demand. The substitutes provide the option to switch whenever the price changes.
• Also, the necessity of a person defines what the type of demand is. A luxury item is part of the elastic demand, while an essential thing forms part of inelastic demand. People are ready to pay higher prices for the necessary items.
• In the case of elastic demand, price and total revenue move in the opposite direction, i.e., since the decline in demand is greater than the price increase, resulting in lower revenue (= Price * Demand) and vice versa. While in the case of inelastic demand, both move in the same direction, i.e., since the decline in demand is lower than the price increase, which may result in increased revenue and vice versa.

The elasticity of demand is a metric to measure the impact of variation in the price of a product on the quantity demanded by consumers. The products with no or few substitutes exhibit inelastic demand. At the same time, the products with an easily available large number of substitutes display an elastic demand since the consumers can shift to other substitutes when there is any change in the product's price. Also, the necessary product segment will exhibit inelastic demand, while luxury and comfort products will have elastic demand. Hence, we can say that the primary driver of the elasticity of demand is the availability of substitutes and the necessity of the product for the population's survival.

This article is a guide to Elastic vs Inelastic Demand. We discuss the key difference between elastic and inelastic demand infographics and a comparison table.

You may also look at the following articles: -

• Elastic Demand Formula
• Price Elasticity of Supply Types
• Calculate Cross Price Elasticity of Demand
• What is Positive Economics?