Elastic Demand and Inelastic Demand refer to how sensitive the quantity demanded of a good or service is to changes in its price. When demand for a product is elastic, it means that changes in price result in relatively larger or equal changes in quantity demanded. However, when demand for a product is inelastic, it means that changes in price result in relatively smaller or no changes in quantity demanded.
What is Elastic Demand?
Elastic Demand is when price changes result in relatively larger changes in quantity demanded. In other words, consumers are very responsive to price changes. If the price of an elastic product increases, consumers tend to decrease their quantity demanded significantly, and if the price decreases, they tend to increase their quantity demanded significantly.
For example, luxury items, non-essential goods, and products with close substitutes have elastic demand.
Features of Elastic Demand:
- Price Sensitivity: In elastic demand, consumers are highly sensitive to changes in price. Even slight price changes can lead to significant changes in the quantity demanded.
- Availability of Substitutes: Elastic Demand occurs when there are many substitutes available for the product. Consumers can easily switch to alternative products if the price of the current product changes.
- Luxury or Non-Essential Goods: Elastic Demand is commonly associated with luxury or non-essential goods, where consumers have the flexibility to adjust their consumption based on price changes without significantly impacting their well-being.
- Flatter Demand Curve: The demand curve for elastic goods is relatively flat, indicating that changes in price lead to proportionally larger changes in quantity demanded.
- Elasticity Coefficient Greater than 1: The price elasticity of demand coefficient (PED) for elastic goods is greater than 1. This indicates that the percentage change in quantity demanded is greater than the percentage change in price.
What is Inelastic Demand?
Inelastic Demand is when changes in price result in relatively smaller changes in quantity demanded. In other words, consumers are not very responsive to price changes. If the price of an inelastic product increases, consumers may still purchase roughly the same quantity, and if the price decreases, they may not significantly increase their quantity demanded.
For example, essential goods like food, medications, and utilities, where consumers have limited alternatives or immediate needs have inlastic demand.
Features of Inelastic Demand:
- Price Insensitivity: In inelastic demand, consumers are relatively insensitive to changes in price. Even significant changes in price may result in minor changes in the quantity demanded.
- Few or No Substitutes: Inelastic Demand occurs when there are few or no substitutes available for the product. Consumers have limited options to switch to if the price of the product changes.
- Necessities or Essential Goods: Inelastic Demand is commonly associated with necessities or essential goods, such as food, medications, and utilities, where consumers must purchase them regardless of price changes.
- Steep Demand Curve: The demand curve for inelastic goods is relatively steep, indicating that changes in price lead to proportionally smaller changes in quantity demanded.
- Elasticity Coefficient Less than 1: The price elasticity of demand coefficient (PED) for inelastic goods is less than 1. This indicates that the percentage change in quantity demanded is less than the percentage change in price.
Difference between Elastic and Inelastic Demand
|
Basis |
Elastic Demand |
Inelastic Demand |
|---|---|---|
|
Meaning |
Elastic Demand is when price changes result in relatively larger changes in quantity demanded. |
Inelastic Demand is when changes in price result in relatively smaller changes in quantity demanded. |
|
Price Sensitivity |
Good with elastic demand are highly sensitive to price changes. |
Goods with inelastic demand are relatively insensitive to price changes. |
|
Availability of Substitutes |
There are many substitutes available. |
Few or no substitutes are available. |
|
Type of Goods |
It is often associated with luxury or non-essential goods. |
It is typically associated with necessity or essential goods. |
|
Impact on Quantity Demanded |
Large changes in quantity demanded for small changes in price. |
Small changes in quantity demanded for large changes in price. |
|
Demand Curve |
The demand curve is relatively flat. |
The demand curve is relatively steep. |
|
Elasticity Coefficient |
Elasticity Coefficient is greater than 1. |
Elasticity Coefficient is less than 1. |
|
Examples |
Electronics, clothing, luxury items. |
Food, medications, utilities. |
Elastic and Inelastic Demand – FAQs
What factors determine whether demand is elastic or inelastic?
The availability of substitutes, the necessity of the good or service, and the proportion of income spent on the item are significant factors.
For example, goods with many substitutes tend to have elastic demand, while necessities often exhibit inelastic demand.
Can demand be perfectly elastic or perfectly inelastic?
Yes, demand can be perfectly elastic or perfectly inelastic.
How does the elasticity of demand affect government policies in India?
In sectors like healthcare and education, where demand is often inelastic, the government may intervene to regulate prices or provide subsidies to ensure affordability and accessibility. In sectors with elastic demand, the government may focus on promoting competition and consumer choice.
How does understanding elastic and inelastic demand help businesses forecast sales?
Businesses can use knowledge of demand elasticity to predict how changes in price will impact sales revenue.
For example, for products with elastic demand, a price reduction could lead to a significant increase in sales volume and overall revenue.
Are there any cultural or demographic factors that influence demand elasticity?
Yes, factors such as income levels, cultural preferences, and lifestyle choices can affect demand elasticity.
For example, products associated with cultural or religious significance may exhibit different elasticity compared to similar products in other regions.