What is Perfectly Inelastic Demand?

Perfectly inelastic is where a small increase or decrease in the price of a product will have no effect on the quantity that is demanded or supplied of that product. There is no elasticity of demand or supply for the product. This will rarely happen in real life, but it is used as a valuable economic theory.

On the opposite side, a perfectly elastic demand would mean that the demand for the product is directly related to the price of the product.

Another elasticity theory in economics is unit elastic demand, which assumes a change in price on a unit per unit basis will cause an equal change in the quantity demanded.

Illustration of perfectly inelastic demand

On a graph, the curve for demand and supply can be depicted with a vertical line for perfectly inelastic goods.

What Does Perfectly Inelastic Mean?

Perfect inelasticity occurs in products or services where consumers do not have any substitute goods to meet their demands. In supply, it happens where there is no substitute product to use in the production. If a 1% change in the price of a product, there will be less than 1% change in the quantity demanded or supplied.

The price of a product will go up, and the consumers will still buy the same number of products, this is the exact same with if the price of the product decreases. Let’s take, for example, the gas in your vehicle. You need gas to drive your car to and from work, it doesn’t matter what the price of gas is you will still fill up your tank.

For example, the price of insulin changed from $100 to $101, this is a 1% increase, the demand varies from 1,000 units to 996 units which are less than 1%, this medication will be considered inelastic. Even with the price change, there is no impact on the amount of insulin needed.

The necessary product, like medication, is generally inelastic because they are needed for survival; luxury products like luxury cars tend to be elastic.

Perfectly Inelastic Products

Perfectly inelastic products in real life are rare. If a product was perfectly inelastic, a supplier would be able to charge any price that they wanted to, and customers will still be willing to buy that product. The most common products that could be considered inelastic are food, medication, and tobacco products. Perfectly inelastic products would be something like air or water, and no one can really restrict that at this point in time. The most common products that are inelastic would be food, prescription drugs, and tobacco products.

Another product that could be considered close to perfectly inelastic would be gas. As mentioned above, if the price of gas changes, you will still need to travel to work and fill up your tank.

Having an inelastic product could determine the supply of the product. If the supplier knows that a 10% decrease in his price will increase, the sales with 15%. He might consider making that decision to be more profitable. If the supplier lowers the price by 10% and receives a 3% increase in sales, then he might not make the decision to reduce the cost.

Elasticity vs. Inelasticity of Demand

The elasticity of demand will depend on the degree of change in the demand or supply after a change in the price. An elastic product will have a change in the demand when there is a change in the price where an inelastic product will have almost no change in the demand.

Example

Example 1: A firm that manufactures goods, operate at their full capacity, meaning they are not able to increase their supply. Additional staff is hired to improve its manufacturing capacity, the company has no short-term capital available, and the company is running out of raw materials.

A labor constraint is a fact that without any short-term capital, the company can not hire more workers to increase its manufacturing capacity. If they do choose to hire new workers, it will take time to produce more product to then cover the costs of the new workers and new raw materials. They could perhaps need to look at a bigger factory to accommodate all the changes.

This example represents and perfectly inelastic company. The company cannot produce more products and can not substitute the product, a change in the price will not affect the supply.

Example 2: Fire extinguishers are a unique product that is only needed in cases of emergencies. If the price of a fire extinguisher increased from $1,550 to $1,855 and the quantity of the demand decreased slightly from 300 units to 295 what is the demand elasticity of the product

Solution

First, we can work out the increase in price:

1855 - 1550 = 305

Next, we can work out the percentage change:

\dfrac{305}{1550} = 20\%

The change in demand was 5 units (300-295) so we can calculate the percentage decrease:

\dfrac{5}{300} = 2\%

Finally, we can calculate the elasticity of the product by dividing the percentage change in price by the percentage change in demand:

\dfrac{2}{20} = 0.1\%

Conclusion

  • Perfectly inelastic is where a small increase or decrease in the price of a product will have no effect on the quantity that is demanded or supplied of that product.
  • If a 1% change in the price of a product, there will be less than 1% change in the quantity demanded or supplied.
  • f a product was perfectly inelastic, a supplier would be able to charge any price that they wanted to, and customers will still be willing to buy that product.
  • An elastic product will have a change in the demand when there is a change in the price where an inelastic product will have almost no change in the demand.