What is the difference between price elastic and price inelastic

If the elasticity quotient is greater than or equal to one, the demand is considered to be elastic. While the price of a good or service is the most common economic factor used to measure the elasticity of demand, there are other measures of the elasticity of demand, including income elasticity of demand and substitute elasticity of demand.

Demand is sometimes plotted on a graph: A demand curve shows how the quantity demanded responds to price changes. The flatter the curve, the more elastic demand is.

The elasticity of demand is commonly referred to as price elasticity of demand because the price of a good or service is the most common economic factor used to measure it.

For example, a change in the price of a luxury car can cause a change in the quantity demanded. If a luxury car producer has a surplus of cars, they may reduce their price in an attempt to increase demand. The extent of the price change will determine whether or not the demand for the good changes and if so, by how much. Price elasticity of demand is calculated by taking the proportional change of the amount purchased in response to a small change in price , divided by the proportional change of price.

The income elasticity of demand is also known as the income effect. The income level of a given population can influence the demand elasticity of goods and services. For example, suppose that an economic event leads to many workers being laid off. During this time period, people may decide to save their money rather than upgrading their smartphones or buying designer purses. This would lead to luxury items becoming more elastic.

In other words, a slight change in income level would lead to a significant change in the consumption of luxury goods. If there is an easy substitute for a good or service, the substitute makes the demand for the good more elastic.

The presence of an alternative good or service makes the original good or service more sensitive overall to price changes. As a result, an increase in demand for iPhones leads to more demand for iPhones. Because iPhone smartphones are a close substitute in quality and price, consumer demand for them will rise. Common examples of elastic products are consumer discretionaries , such as a brand of cereal.

Certain food products are not a necessity. Another example of an elastic product is a Porsche sports car. Because a Porsche is typically such a large portion of someone's income, if the price of a Porsche increases in price, demand will likely be elastic.

There are also alternatives, such as Jaguar or Aston Martin. Similarly, if the price of a Kit-Kat chocolate bar increases, people will buy a different type of candy bar. Richard B. Patton, president of Heinz U. An inelastic product, on the other hand, is defined as one where a change in price does not significantly impact demand for that product. Should demand for a good or service be static when its price or other factor changes , it is said to be inelastic.

In other words, when the price changes or consumer's incomes change, they will not change their buying habits. Inelastic products are necessities and, usually, do not have substitutes they can easily be replaced with.

Since the quantity demanded is the same regardless of the price, the demand curve for a perfectly inelastic good is graphed out as a vertical line. For businesses, there are many advantages to price inelasticity. For example, they have greater flexibility with prices because demand remains basically the same, even if prices increase or decrease. If the business raises its prices up or down, consumers' buying habits will remain mostly unchanged.

This can impact demand and total revenue for a business in a couple of different ways. First, a business may have less overall revenue. If the price for an inelastic good is decreased and the demand for that good does not increase, this would result in a decrease in revenue. For this firm, there is no beneficial outcome in reducing the price of its goods.

Second, a business may experience more overall revenue. If the price for an inelastic good is increased and the demand for that good stays the same, the total revenue will increase because the quantity demanded has not changed.

Normally, a price increase does, in fact, lead to a decrease in quantity demanded even if it is small. So, businesses that deal with inelastic goods are generally able to increase their prices, sell a little less, and still make higher revenues. They tend to be protected against economic downturns and better able to maximize profits. The most common goods with inelastic demand are utilities, prescription drugs, and tobacco products. In general, necessities and medical treatments tend to be inelastic, while luxury goods tend to be the most elastic.

Another typical example is salt. The human body requires a specific amount of salt per pound of body weight. Too much or too little salt could cause illness or even death, so the demand for it changes very little when price changes—salt has an elasticity quotient that is close to zero and a steep slope on a graph.

While there are no perfectly inelastic goods , there are some goods that come pretty close. For example, people need gas to drive their cars. Even if gas prices get higher, people may not be able to stop commuting to work, taking their kids to school, and driving to the store.

In the same way, if the price falls, there will not be much change in the quantity demanded by consumers. The differences between elastic and inelastic demand can be drawn clearly on the following grounds:. The elasticity of demand represents the extent to which the variation in the price of a good will affect the quantity demanded by consumers.

Products with no or less close substitutes have an inelastic demand. As compared to the products with a large number of substitutes, have an elastic demand because of the consumers switch to different substitute, if there is a small change in their prices. Therefore, it is true to say that the less the substitutes, the more the inelastic demand.

In addition to this, if a huge part of the income is spent on purchasing the product, then also the demand for it is elastic, for the consumers who are highly price sensitive. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Key Differences Between Elastic and Inelastic Demand The differences between elastic and inelastic demand can be drawn clearly on the following grounds: Elastic Demand is when a small change in the price of a good, cause a greater change in the quantity demanded.

Inelastic demand means a change in the price of a good, will not have a significant effect on the quantity demanded. The supermarket manager learned this lesson the hard way. Examples of products whose demand is price elastic are restaurant meals, sodas, vacations, jewelry, high-priced cars and fashionable clothing. Vacations and eating out at restaurants are purchases that people reduce when prices go up.

A ratio less than one means that the demand for a product is inelastic. Sales volume does not change significantly when prices go up or down.

A few examples of products that are price inelastic are gasoline, medical procedures, water, electricity and clothing. Consumers continue to buy gasoline even if the price goes up because they have to go to work and take the kids to ball practice.

If the doctor tells a patient to get a blood test, there are no options; the patient has to pay for the test regardless of the cost. Whether the demand for a product is price elastic or inelastic is important to marketers. They must be able to anticipate how sales volumes will react to price changes in order to design marketing and pricing strategies.

Raising prices to improve profits might be an effective move if the sales volume doesn't drop significantly, but the manager must have a clear understanding of a product's elasticity economics when making these decisions. Marketers conduct tests to determine whether a product is price elastic or inelastic.