Inelastic demand

Indian Economy glossary

Also called: Relatively inelastic demand, Price inelastic demand · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"

Meaning

Demand is inelastic when the percentage change in quantity demanded is smaller than the percentage change in price. In other words, |eD| < 1. Buyers keep buying roughly the same amount even when the price changes. When demand is inelastic, total spending moves in the same direction as price. Necessities, habit-forming goods and goods that take a tiny share of the budget usually have inelastic demand.

Example

If eD = −0.2 and the price rises by 10%, the quantity falls by only 2%, so spending rises by about 7.8%. This is why petroleum, tobacco and alcohol give the government stable tax revenue. Sales hardly fall when these goods are taxed, and most of the tax burden falls on consumers.

Don't confuse with

  • Perfectly inelastic demand: here eD = 0, the quantity does not change at all, and the demand curve is vertical. Ordinary inelastic demand is only less than 1.

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