Inelasticity

Inelasticity, in economics, refers to the characteristic of a good or service where a change in price leads to a proportionally smaller change in the quantity demanded or supplied. This means consumers and producers are relatively unresponsive to price fluctuations. Demand is considered inelastic when the absolute value of the price elasticity of demand is less than 1. Similarly, supply is inelastic if the price elasticity of supply is less than 1. Factors influencing inelasticity include the availability of substitutes, the necessity of the good, the proportion of income spent on the good, and the time horizon considered.

Inelasticity meaning with examples

• The demand for gasoline is often considered inelastic because people need it to commute, regardless of price fluctuations. Even with price increases, drivers will likely still need to fill their tanks, reducing the drop in demand. This inelasticity allows gas companies to maintain revenue during times of higher prices, as demand hardly changes.
• Salt's demand shows extreme inelasticity. Because it is a basic necessity, even dramatic price changes are unlikely to significantly alter how much salt people buy. Restaurants and individuals would likely continue purchasing and consuming at roughly the same levels, as a pinch costs little.
• The supply of land for construction is often inelastic in the short term because it takes a significant amount of time to add new land. Development projects may cause increasing prices, as construction companies and developers may be willing to pay more to secure a limited resource.
• Medication for life-threatening conditions, like insulin for diabetics, often exhibits inelastic demand. Price hikes can severely affect affordability for those who need medication daily to live. This inelastic demand shows how prices in this sector are not impacted by typical market effects.
• During a recession, the demand for essential goods, such as bread, remains relatively inelastic. While consumers might cut back on discretionary spending, their need for basic food items remains constant, limiting the impact of a recession on demand for these goods.