Perfectly Inelastic Demand

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21 Aug, 2024

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Perfectly inelastic demand refers to a situation in which an increase in the price of a commodity does not result in any change in the quantity demanded by customers. This concept particularly applies to unique situations where customers have no substitute for a required commodity.

Items such as life-saving drugs, essential commodities, food crops, internet access, and oil and natural gas fall into the category of perfectly inelastic demand. It underscores the essential nature of certain goods, which consistently remain in demand regardless of price fluctuations. This concept plays a crucial role in assessing pricing strategies, understanding consumer behavior, and determining the economic significance of essential commodities.

What Is Perfectly Inelastic Demand?

Perfectly inelastic demand is a scenario wherein a price hike for a product does not influence the quantity customers wish to purchase.
It helps illustrate specific circumstances where consumers lack alternative options for the product they require.
The scenario allows manufacturers to raise prices, yet it can lead to consumer harm through price gouging by businesses.
It sees unchanging demand despite price increases. Conversely, Perfectly Elastic Demand results in infinite quantity changes as prices fluctuate.

Perfectly Inelastic Demand Explained

Perfectly inelastic demand represents a situation where the quantity of a good demanded remains constant despite variations in its price. This phenomenon can only occur when the demand curve becomes perfectly vertical, indicating that the quantity demanded remains fixed.

This situation typically arises when a product has no substitutes or is part of essential commodities like water or food crops. In such cases, consumers have no choice but to purchase the product at whatever price is available. This means that even if the product price increases significantly, the demand for the product remains unchanged.

Businesses that produce goods or services considered indispensable to the public can increase prices without fearing a decrease in demand. This situation can lead to monopolistic market conditions, where a single provider controls the market. Governments can also utilize perfectly inelastic demand to generate higher revenue through increased taxation on such goods and services. While it is a valuable concept for economists studying situations where consumers have limited alternatives, its real-world applicability is rare, primarily limited to certain unique products.

Perfectly inelastic demand serves as a tool for pricing analysis and offers insights into consumer behavior within the financial landscape. However, it can potentially harm both the economy and consumers when it leads to monopolistic control or excessive pricing.

Examples

Let us look into a few examples to understand the topic.

Example # 1

Water can serve as a good example of a product with nearly perfectly inelastic demand in certain situations. In regions with limited access to clean and safe drinking water and no viable substitutes, the demand for water remains constant regardless of price fluctuations. People depend on water for basic survival, and there are no alternatives to quench their thirst or meet their daily needs. In such cases, even if the price of water were to rise significantly, people would still be compelled to purchase it, as it is an essential requirement for life, making its demand highly inelastic.

Example # 2

Perfectly inelastic demand can be illustrated using the example of insulin, a life-saving medication for people with diabetes. Imagine someone who relies on insulin to manage their condition. The demand for insulin is perfectly inelastic for them because no substitutes are available, and without insulin, their health and even their life are at risk. Regardless of the price, this person will continue to buy insulin because it's essential for their well-being. Even if the price of insulin were to increase significantly, they would still purchase it because there's no alternative. In this case, the quantity demanded for insulin remains the same, showcasing perfectly inelastic demand.

Advantages And Disadvantages

Some of the advantages and disadvantages are the following:

#1 - Advantages

Manufacturers can ask for higher prices for their products.
Governments can easily raise revenue under higher prices without affecting customer demand.
Economists can create and test economic models where customers have few choices.
Businesses may maximize profits.
Markets may stabilize, and investors can profit from their investments.
Firms can generate and predict accurate sales revenue for their products.
Consumers may be sure of getting life-saving drugs and essential goods in every situation.

#2 - Disadvantages

Price gouging by businesses harms consumers.
Businesses may have less incentive for innovation.
It is rare to find in the real world.
It may lead to consumer unrest due to higher prices for the same product.
Market failure may occur due to it behaving like a monopoly.
The market may behave like a monopoly.
Higher prices may make it difficult for consumers to afford critical products.

Difference Between Perfectly Inelastic And Perfectly Elastic Demand

In economics, there are two major types of demand, as discussed here. Hence, let us use the table below to understand the differences between the two:

Perfectly Inelastic Demand	Perfectly Elastic Demand
No change in demand for goods with rising prices.	Infinite changes in demand for goods quantity with changing prices.
The demand curve remains vertical.	The demand curve is horizontal.
No substitute exists for the product.	Multiple product substitutes are available.
Firms have a free hand in increasing the goods price.	Businesses cannot control product prices.
Customers are forced to buy the product at any price range due to the absence of alternatives.	Consumers have multiple choices from which to buy.
Mostly exists in an imaginary world except for some products.	Has no existence in the real world.
Limited competition or monopoly exists.	High competition in the market exists.
Life-saving goods and essential commodities come under this group.	Luxury goods and products with numerous substitutes come under this group.

Frequently Asked Questions (FAQs)

1. What role does necessity play in perfectly inelastic demand?

Necessity is a critical factor in perfectly inelastic demand. It occurs when a good or service is an absolute necessity with no close substitutes, like life-saving medications or critical utilities. Consumers have no choice but to purchase these items regardless of price increases, making their demand perfectly inelastic.

2. Can perfectly inelastic demand exist in competitive markets?

Perfectly inelastic demand can exist in competitive markets, but is relatively rare. It typically occurs when a product is so essential or unique that consumers have no alternatives. For instance, some medical treatments or specific emergency services may exhibit perfectly inelastic demand even in competitive environments. In most cases, competition can influence price, but in perfectly inelastic scenarios, consumers have no choice but to pay the asking price.

3. How does perfectly inelastic demand impact pricing strategies?

Perfectly inelastic demand can pose challenges for pricing strategies. Since consumers have no choice but to purchase the product, businesses may exploit this by setting high prices, potentially leading to consumer dissatisfaction. Companies may not be motivated to lower prices or improve product quality in such scenarios.