When demand is inelastic, it means that the quantity demanded of a good or service changes relatively little in response to changes in price. In other words, consumers are not very sensitive to price changes. Here are some key points regarding inelastic demand:
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Definition: Demand is considered inelastic if the price elasticity of demand (PED) is less than 1 (in absolute value). This indicates that a percentage change in price results in a smaller percentage change in quantity demanded.
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Characteristics:
- Necessities: Goods that are considered essential, such as basic food items, medicine, or utilities, often have inelastic demand. Consumers will buy them regardless of price changes.
- Few Substitutes: Products that have few or no close substitutes tend to have inelastic demand because consumers cannot easily switch to alternatives.
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Price Changes:
- When the price of a good with inelastic demand increases, total revenue for the seller typically increases, as the drop in quantity demanded is proportionally smaller than the increase in price.
- Conversely, if the price decreases, total revenue may decrease because the increase in quantity demanded will not be enough to offset the lower price.
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Graph: On a demand curve graph, inelastic demand is represented by a steep slope, indicating that the quantity demanded does not change much with price fluctuations.
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Examples: Common examples of goods with inelastic demand include:
- Prescription medications
- Gasoline
- Salt
- Certain types of healthcare services
Understanding inelastic demand is crucial for businesses and policymakers as it affects pricing strategies, tax policies, and resource allocation decisions.