Inelastic Goods

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21 Aug, 2024

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Inelastic Goods Definition

Inelastic goods are those commodities whose demand doesn't change with the price variations. An increase or decrease in the product's price level doesn't affect its demand. Even though there will be a slight variation in demand, it will be insignificant compared to the change in price.

Inelastic goods do not alter consumer buying behavior and do not follow the law of demand. Hence, the price elasticity of demand for such goods will be less than one, and the demand curve will be steep. Examples of inelastic goods include food, water, medicines, etc.

Inelastic Goods Definition

Inelastic goods display a unique feature where their demand doesn't vary much with the price changes. That is, slight variations in demand do exist, but the rate of variation of price and demand will not be the same.
If price changes do not alter the demand levels, the product is perfectly inelastic. It means that the product is completely unaffected by the price.
The difference between elastic and inelastic goods is that the demand for the former changes significantly even with a small price change.

Inelastic Goods Explained

Inelastic goods are commodities whose demand doesn't alter with an increase or decrease in price. Unlike most goods, it does not follow the law of demand, which states that the demand for a product varies inversely with its price.

Because of this, the demand curve for these goods is steep, which shows the absence of a relation between price and demand. Inelastic commodities are identified by considering an x% change in their price. If the change in demand is less than x%, the good is inelastic. If it is more than x%, the good is elastic.

For example, consider a company PQR, which launches a new version of car X. The original version was priced at $1000, and the company could sell 500 units monthly. The latest version has some advanced features. Therefore, the company plans to sell at $1300. PQR predicts that the sales for the first month should be around 400 units.

Here, the increase in price is 30% (x= 30%).

The forecasted decrease in demand is 20%.

Since the 20% decrease in demand is less than the 30% increase in price, the car is inelastic.

But once the product was launched, the company could only sell 340 units (68% of the original numbers sold). Therefore, since a 32% decrease in demand is more than the 30% increase in price, the car has become elastic.

Total revenue with original version = $1000 x 500 = $500,000

Gross expected revenue with new version = $1300 x 400 = $520,000

Total revenue with new version = $1300 x 340 = $442,000

Therefore, the company did not reach its target. Instead, the revenue became lesser than before. As a result, it might have even made a loss.

Considering the case where the company could sell 500 units of the new version, the price change wouldn't have affected the demand. That is, the car would have been perfectly inelastic.

Perfectly inelastic goods show no variation in demand with price changes. Therefore, the demand curve of such items is a vertical line. However, perfectly inelastic goods do not exist in reality. But essential commodities like water and air are almost perfectly inelastic. Hence, even if the price becomes exorbitant, people need them for survival.

Example

Let's look at a real-life example of inelastic goods to clarify the concept.

The falling oil and gas prices in the United States caused a concern among many in the country when they dropped by 22% on June 22. However, some investors are optimistic and predict that the price will increase, while others speculate that the price will decrease, fueled by the economic recession.

But some argue that the price will not affect the gasoline demand, as it is inelastic. However, when the rising gasoline prices cause the cost of food, electricity, etc., to go up, people might choose to drive less. Then, gasoline might become an elastic good.

Elastic goods are those commodities, the demand for which changes with the price variations. Therefore, if the price increases, the demand will decrease and vice-versa.

Elastic vs. Inelastic Goods

Here are the main differences between elastic and inelastic goods

Elastic Goods	Inelastic Goods
1. Demand for commodities changes with price.	1. Demand for the commodity remains nearly constant with price changes.
2. Follows the law of demand.	2. Deviates from the law of demand.
3. Alters consumer buying behavior.	3. It doesn't affect buying behavior.
4. The demand curve for this is flat.	4. The inelastic demand curve is a steep slope line.
5. Examples of elastic goods include apparel, electronic appliances, etc.	5. Basic human necessities and medicines are common examples of inelastic goods.
6. Elasticity quotient is more than one	Elasticity quotient is less than one

The price elasticity of demand (e_p) can be given as:

Change in demand/ Actual demand

Price elasticity = ---------------------------------------------------------

Change in price/ Actual price

When e_p> 1 for a product, it is elastic,

whene_p< 1, the product is inelastic,

whene_p = 1, demand for the product varies proportionately with the price.

Frequently Asked Questions (FAQs)

1. What are inelastic and elastic goods?

Inelastic commodities are those whose demand doesn't vary much with price changes, whereas the demand for elastic goods varies greatly even with a small fluctuation in price.

2. Are inelastic goods expensive?

No. It need not always be the case. Inelasticity can happen when a product's price goes up and down. Therefore, expensive goods being inelastic is only one case. For instance, consider a luxury car brand that manufactures a model worth $5 million and increases it to $5.25 million. The people who buy the car when it costs $5 million would still buy it anyway. Similarly, the other case is when the price of a product decreases, but its demand remains the same.

3. Are inelastic goods inferior?

No. There is no solid basis for labeling inelastic goods as inferior. Firstly, luxury goods too can be inelastic. Secondly, there is no relation between inelasticity and inferiority. However, inferior commodities can be elastic. When the price of such goods rises, the demand decreases, as customers can buy quality products for the same price.