Perfectly inelastic demand

Perfectly inelastic demand
See also
Inelastic supply Diminishing marginal utility Normal good Income effect Short run aggregate supply curve Cross elasticity of demand Marginal cost Price controls Monopolistic competition

Perfectly inelastic demand occurs when the quantity demanded of a good does not change at all, regardless of changes in price. This is represented by a vertical line on a demand graph, indicating that the quantity demanded of the good will remain the same, regardless of the price. It is important to note that perfectly inelastic demand is rare, as most goods have some degree of elasticity in the demand. The following are examples of perfectly inelastic demand:

• Necessities: Necessities are goods that are essential for consumers to buy, such as food, clothing, and health care. Consumers will generally purchase the same quantity of these goods, regardless of the price, meaning that there is no elasticity in the demand.
• Luxury Goods: Luxury goods are items that are considered unnecessary and are often considered a status symbol. These goods are usually highly inelastic, as they are purchased more for the brand or status than for the price.
• Government Services: Government services, such as public transportation, are usually perfectly inelastic, as the quantity of the service provided will not change regardless of the cost.

Example of Perfectly inelastic demand

Perfectly inelastic demand occurs when the quantity demanded of a good does not change at all, regardless of changes in price. This is represented by a vertical line on a demand graph and is usually found in cases of necessities, luxury goods, and government services.

For example, the demand for food and other essential items, such as health care, is usually perfectly inelastic, as consumers will purchase the same quantity regardless of the price. Luxury goods, such as designer clothes, are also perfectly inelastic, as the demand for these items is more about the status than the cost. Lastly, government services, such as public transportation, are usually perfectly inelastic, as the quantity of the service provided will not change regardless of the cost.

In conclusion, perfectly inelastic demand is rare and occurs when the quantity of a good remains the same, regardless of the price. This is most common with necessities, luxury goods, and government services.

Formula of Perfectly inelastic demand

The formula for perfectly inelastic demand is given by:

Failed to parse (syntax error): {\displaystyle \begin{equation*} Q_{d}=k \end{equation*}}

where Qd is the quantity demanded of a good and k is a constant. This equation shows that the quantity of a good demanded does not change when the price changes, making the demand perfectly inelastic.

When to use Perfectly inelastic demand

Perfectly inelastic demand is most often used by companies when the quantity of a product does not change, regardless of the price. This allows companies to maximize the profit for the product and is often used for necessities, luxury goods, and government services. Perfectly inelastic demand allows companies to set the price of their product to the highest level that the market will bear, as the quantity demanded will remain the same. This can be beneficial in the short term, but can be unsustainable in the long run, as consumers may eventually switch to other products with lower prices.

Types of Perfectly inelastic demand

Perfectly inelastic demand can be further classified into three distinct types: total, partial, and price inelasticity. Total inelasticity occurs when the demand for a good does not change at all, even when the price is lowered to zero. Partial inelasticity occurs when the demand for a good does not change by the same proportion as the price. Price inelasticity occurs when the demand for a good changes, but not in a proportional manner.

• Total Inelasticity: Total inelasticity occurs when the demand for a good does not change, regardless of the price. This type of inelasticity is rare but can occur with goods that are essential for consumers, such as food and medicine.
• Partial Inelasticity: Partial inelasticity occurs when the demand for a good does not change by the same proportion as the price. This type of inelasticity is common with goods that are considered luxuries or are not essential for consumers, such as cars and electronics.
• Price Inelasticity: Price inelasticity occurs when the demand for a good changes, but not in a proportional manner. This type of inelasticity is common with goods that are highly price sensitive, such as gasoline and electricity.

Advantages of Perfectly inelastic demand

Perfectly inelastic demand can be beneficial for both consumers and producers. For consumers, it ensures that they will always be able to purchase essential goods, regardless of the price. This is especially helpful for low-income households who may not be able to afford goods if the price changes. For producers, perfectly inelastic demand can help them to ensure that they have consistent revenue, as the quantity demanded will not decrease, even if the price of the good decreases.

Additionally, perfectly inelastic demand can help to stabilize prices in the market, as producers will not be able to increase prices beyond a certain point. This helps to protect consumers from market manipulation and ensures that prices remain relatively stable.

Limitations of Perfectly inelastic demand

Perfectly inelastic demand has certain limitations. First, it is rare to find goods that are perfectly inelastic, as most goods will have some degree of elasticity in the demand. Additionally, perfectly inelastic demand does not account for changes in the quantity of a good over time, as the demand remains the same regardless of the price. Finally, perfectly inelastic demand does not take into account any changes in the cost of production, which could affect the price of a good. Therefore, perfectly inelastic demand is limited in predicting changes in demand for goods.

Other approaches related to Perfectly inelastic demand

• Price Ceiling: A price ceiling is an artificial limit on the price of a good or service, such as rent control or minimum wage. This keeps the price of the good or service from rising above a certain level, making it perfectly inelastic.
• Price Floor: A price floor is the opposite of a price ceiling and is an artificial minimum price for a good or service. This makes it perfectly inelastic, as the quantity demanded of the good or service will remain the same regardless of the price.
• Total Revenue Test: The total revenue test is a mathematical formula used to determine the elasticity of demand for a good or service. It is calculated by dividing the total revenue by the quantity demanded.

In conclusion, there are other approaches related to perfectly inelastic demand, such as price ceilings, price floors, and the total revenue test. All of these approaches keep the quantity of the good or service from changing, regardless of the price.

Suggested literature

• Mulligan, G. F., & Fik, T. J. (1989). Price variation in spatial markets: the case of perfectly inelastic demand. The Annals of Regional Science, 23, 187-201.
• Wang, C., & Segarra, E. (2011). The economics of commonly owned groundwater when user demand is perfectly inelastic. Journal of Agricultural and Resource Economics, 95-120.