Elastic vs. Inelastic Demand: Guide to Elasticity and Inelasticity

Elasticity of demand measures the degree to which demand responds to changes in factors called determinants of demand; these include things like the price of the goods, consumer income level, and substitute availability. If demand is elastic, economic changes have a significant effect on demand. Price changes are most often used as a determining factor in elasticity, so “elasticity of demand” may also be referred to as “price elasticity of demand.” (Other types of elasticities include cross-price elasticity of demand, price elasticity of supply, and income elasticity of demand.)

You can calculate elasticity by dividing the percentage change in demand by the percentage change in the determinant, such as price. If the ratio of percentage change in demand to the percentage change in the determinant results in an elasticity quotient greater than one, the demand is considered elastic. When plotted on a graph where the Y-axis represents price and the X-axis represents quantity of demand, an elastic demand curve is flat. Unitary elasticity refers to a commodity that responds to changes in determinants with a quantity demand change of one.

Certain commodities tend to have more elastic demand. Examples of elastic commodities include products like vehicles, appliances, and luxury goods that are purchased infrequently. Consumers may choose to postpone purchasing if the price of these goods is temporarily high. Products with close substitute availability, such as different brands of ice cream, may also have elastic demand as consumers typically switch to cheaper alternatives in response to price changes.

The formula for calculating elasticity involves dividing the percentage change in demand by the percentage change in the determinant. To calculate the ratio, use this formula:

Price Elasticity of Demand = % Change in Demand / % Change in Price

You can expand this formula to the following:

Price Elasticity of Demand = [(Quantity A - Quantity B) / Quantity A] / [(Price A - Price B) / Price A]

As an example of elasticity of demand, consider the price and demand changes of ice cream. In this scenario, the price for ice cream increases from $5 to $5.50 and the change in quantity demanded for ice cream decreases from 60 to 45 units. In this scenario, this formula looks like this:

Price Elasticity of Demand = [(60 - 45) / 60] / [(5 - 5.50) / 5] = 2.5

Since the elasticity coefficient is 2.5 (higher than 1), the demand is elastic.

Inelastic demand means that the change in price or another determinant of a commodity doesn’t have a significant change in demand. In other words, the demand of the goods isn’t responsive to price changes or other pressures and has a static or inelastic nature. On a graph where the Y-axis represents price and the X-axis represents quantity of demand, an inelastic demand curve is relatively vertical.

Although there may be some small changes in demand, they are negligible compared to the overall demand due to the nature of the consumption. This is common for commodities that are either necessities or which don’t have accessible substitutes. Commodities that are usually inelastic include essential products like medications, food, oil, or fuel, so consumer demand typically is static.

As an example of inelasticity of demand, consider a scenario involving the price of fuel. In this case, the price of fuel rises from $20 to $25 for a percentage change of 25 percent, and the quantity of demand for fuel decreases from 100 to 95 for a percentage change of 5 percent. In the formula, this looks like:

Price Elasticity of Demand = 0.5 / 0.25 = 0.2

Since the elasticity of demand is less than 1, the commodity has inelastic demand.

There are several key differences between elastic and inelastic demand. Commodities with elastic demand have significant responses to changes in determinants of demand. On the other hand, commodities with inelastic demand have negligible changes to the quantity of demand in response to changes in determinants of demand.

As such, inelastic commodities are a more stable source of revenue. Inelastic commodities are usually essentials like fuel or food. While consumers may make some small choices to reduce costs, they will continue to purchase these products even as prices increase. In contrast, elastic commodities are generally elective purchases that may be deferred altogether in more expensive markets. Sellers of inelastic goods can generate higher total revenue by increasing prices, but sellers of elastic goods may need to lower prices or offer discounts to stimulate demand.

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