Elastic and inelastic demand are important terms in the world of economics. Both terms refer to product demand as affected by several factors. This article seeks to define the fundamental differences between these concepts when price is the variable.
Elastic demand refers to the change in the demand for certain goods as their prices decrease or increase. It determines the change in the number of goods demanded as a reaction to a change in their price. This type of demand is also known as price-sensitive demand.
To determine elasticity, divide the percentage change in the demand by the percentage change in a different variable. Price elasticity is calculated by dividing the percentage change (i.e. mathematical expression of relative change over time) in demand by the change in price. For instance, a fast food place sells sodas for $1.00. Ten grade school students walk in and want to buy the soda. Upon informing the thirsty students that the price of soda has increased by $0.50 cents or 50%, only 6 of the students, or 60%, still wanted to buy the soda despite the increase. Thus, dividing .60 by .50 will result to a price elasticity quotient of 1.2. An elasticity quotient equal to or greater than 1 means the demand is elastic.
Inelastic demand occurs when the demand for a certain product is not affected by any changes to its price. Goods and services that are considered as “life necessities” typically have inelastic demand. These are products such as water, gas, salt, soap, and more. Also included are products people are addicted to such as cigarettes or liquor, or other items that have no close substitutes.The demand for a certain product is inelastic in instances where, regardless of the price, consumers will still purchase the goods. This also means that if the price of a certain product decreases, there’s not going to be any significant change in the demand for the goods.
To determine if the demand for a product is inelastic, divide the percent change in the quantity demanded by the percent change in price. If the result (elasticity quotient) is less than 1, the demand is considered to be inelastic. When displayed in a graph, inelastic demand has a steep or vertical slope.
Elastic vs Inelastic Demand
So, what’s the difference between elastic and inelastic demand? Elastic demand is observed when a demand for a certain product changes accordingly to a price change in the said product. In contrast, inelastic demand shows that any movement in the price of a product does not affect the demand for that product. The elasticity of demand for goods or products is determined by calculating the ratio of the percent change in the demanded quantity to the percent change in the price of the product. If the elasticity quotient is equal or greater than 1, the demand for the product is considered elastic. The demand for the product is considered inelastic if the resulting value is less than 1.
|Elastic Demand||Inelastic Demand|
|A change in the price of the product has a significant effect on the quantity demanded of the product||A change in price does not affect the demand for the product|
|Elasticity quotient is equal to or greater than 1||Elasticity quotient is less than 1|
|Graphed data shows a flat, horizontal, negative slope||Graphed data shows a steep, vertical slope.|
|For example, Colas or non-essential goods||For example, salt, water, gasoline|
Here’s a simple (and fun!) explanation of elastic and inelastic demand.