Inelastic Goods - Explained
What are Inelastic Goods?
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Table of ContentsWhat are Inelastic Goods?How to determine whether a Good is Inelastic?Perfectly Inelastic GoodsElasticity of DemandAcademic Research on Inelastic Goods
What are Inelastic Goods?
Inelastic in economics is a term used to define the unchanging status of a customers buying habit even after changes in price. Simply put, it refers to a situation where an increase in price of commodities doesnt affect a consumers demand, and a decrease in the price of a product still doesnt affect a consumers demand.
How to determine whether a Good is Inelastic?
When set in percentage terms, the word inelastic simply means that 1% change in the price of goods and services doesnt amount to 1% change in the quantity demanded of such commodities. Subsequently, it doesnt lead to a 1% increase in supply too, as there is no additional demand. For instance, assume that the price of a spare Yamaha tyre increased to $300 per unit from $250. Basically, we can say that this is a 20% increase from the previous price. However, if the demand for Yamaha tires dropped from just 3000 units to 2700 units, then itd be equivalently to a 10% decrease in demand, which is not up to the 20% increase in price. If a situation like this were to occur, then we can call those tires inelastic goods. In a case where the 20% increase in price doesnt change demand (that is demand stays at 3000 units regardless of the additional $50 price) then we say that these products are perfectly inelastic. In most cases, the need for a basic item tends to be inelastic while that of a luxury want tends to much more on the elastic side. Take for example food and clothes. If Adidas decides to up the price of one of their polos from $50 to $80, the chance of a lower demand for such a shirt would be high. This is because, most people buying those clothes already have enough to satisfy their clothing needs, with any additional unit of such clothings being a mere want or a means to satisfy their desires. Food on the other hand might be inelastic depending on which product type youre buying. If the cost of a can of water were to increase by $.30, the effect on demand would be relatively low, as most people would still need to drink can water anyway. For a perfectly inelastic product, the demand curve is depicted as a vertical line in graphical presentations due to the steady demand at any price level. Supply can also be perfectly inelastic, just like seen in a work of art. Even if more customers are running around making ernomous offers, there can only be one of such a product, i.e. one original version of such art.
Perfectly Inelastic Goods
It is rare to see a perfectly inelastic product. No one really exists, if not, most producers and manufacturers would be making trillions since they know that consumers would buy their products even if the prices went up to the skies. The only two perfectly inelastic goods are air and water, and gladly, it is not regulated by any body or association. However, some goods do happen to come close to being perfectly inelastic. For instance, gasoline is a product that has a fluctuating price. The major cause of price changes in gasoline is supply, and in a situation where supply drops, the cost of gasoline would increase. However, this doesnt stop people from buying it even at this high price. People need to drive their cars around, especially those that are used to it. While this might make it look like something that is perfectly inelastic, the truth is that it really isnt. This is because after a while, people would get used to taking the bus, some might even move closer to their workplace, and some might ration their gasoline by changing their lifestyle. This makes it inelastic and not perfectly inelastic. However, for the first few weeks of this price influx, most persons wont have a choice but to purchase gasoline before changing their lifestyle.
Elasticity of Demand
An elastic good is the direct opposite of an inelastic good in all ramifications. Simply put, in an elastic good, a 1% increase in price leads to more than 1% decrease in demand and vice versa. Almost all the goods were making use of are elastic due to the presence of substitutes and the lack of uniqueness. Take for example a Windows PC. If the price of a Hewlett-Packard laptop, lets say X model, were to increase from $400 to $500 per unit, which is a 25% increase in price, the probability of more than a 25% decrease in demand is relatively 1 (simply put, it is very likely to occur). If the demand was formerly 4000 units, and after the price increase, it declines to 2000 units, which is up to 50%, then this product is said to be inelastic. This would occur due to the presence of substitutes in market. People could opt for Dell, Toshiba, Lenovo, or simply transition over to Mac or Linux OS. For a product to be perfectly elastic, it needs to have a huge number of competitors. Take for instance, an Adidas polo which was formerly $100 and the price increased to $110. This is a 10% increase in price. Some persons might opt for Nike instead, while some will go with other designer brands. However, since Adidas is an established company, there is every possibility that theyve done their homework, and have calculated that decrease in demand wont surpass 10%. So, if demand drops from 330 units to 300, which is 10%, then this polo will be said to be perfectly elastic. The demand curve of a perfectly elastic product is usually horizontal because even a minute change in price leads to an infinite change in quantity demanded. Inelasticity is used by different firms to predict the chance of profit if price is increased or decreased. For instance, if a shoe manufacturer conducts market research and notices that a 4% decease in the price of his newest production would lead to a 20% increase in demand, then the most rational thing to do is to to cut off 4% or even more off the price of his newest shoe. However, if market research shows that a 4% decrease would lead to a 2% increase in demand, theres no way he can cut off 4% if he wishes to remain profitable. Also, if he sees that a 5% increase in price would only lead to a 1% decrease in demand, he might choose to increment the cost of his product. On the other hand, if a 5% increase in price would lead to a 4% decrease in demand, then itd be irrational to add that percentage amount to the initial price of the good or service.