Inelastic Demand
What is Inelastic Demand?
Inelastic demand is when the quantity demanded changes less than the price changes.
In inelastic demand, the percentage change in quantity demanded is less than the percentage change in price. This means that consumers are not very sensitive to price changes. Goods with few substitutes, such as necessities, often have inelastic demand.
Inelastic Demand: a worked example
A toll bridge with no nearby alternative crossing raises its toll from $4 to $5, a rise of 1/4 = 25 percent. Daily crossings slip from 20,000 to 19,000, a fall of 1,000/20,000 = 5 percent. Elasticity is 5/25 = 0.2, well under 1, so demand for the crossing is inelastic. Check the revenue: 4 x 20,000 = $80,000 a day before, 5 x 19,000 = $95,000 after, a gain of $15,000 a day. Some drivers really did quit, but nowhere near enough to cancel out the higher toll.
The mistake students make with inelastic demand
Students read inelastic as 'quantity does not change,' then draw a vertical demand curve or claim buyers purchase the identical amount as before. That describes perfectly inelastic demand, an elasticity of exactly 0, which is a rare extreme. Ordinary inelastic demand is any value between 0 and 1: quantity still falls when price rises, just by a smaller percentage than the price rose. In the toll example, crossings dropped by 1,000 a day, a real response on a downward sloping curve.
Inelastic Demand questions
Does raising the price always increase revenue when demand is inelastic?
Raising the price increases total revenue whenever demand is inelastic at that price, since quantity falls by a smaller percentage than price rises. The catch sits in the phrase 'at that price.' Keep pushing the price up along a straight-line demand curve and you eventually cross the midpoint into the elastic range, where further increases start shrinking revenue. Inelastic describes one stretch of a curve, not the curve as a whole.
Why do governments like to tax goods with inelastic demand?
Governments favor taxing goods with inelastic demand because the quantity sold barely falls, so the tax raises plenty of money while shrinking the market very little. If a $2 per-unit tax pushes the price up and sales drop only slightly, revenue lands near $2 times the original quantity and the deadweight loss triangle stays thin. The same low elasticity means buyers absorb most of the burden, since they have few alternatives to switch to.
Formula / Example
This is the live Elasticity sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated