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Definition of Inelastic Demand:
An inelastic demand
is a good or service's demand that has a price elasticity of demand less than one. The percentage change in the quantity demanded is less than the percentage change in price following a price change.
The product with an inelastic demand is not as sensitive to a price change as products with an elastic demand. For example, if management increases its price by two percent, they can expect sales to fall less than two percent. A price increase results in an increase in total revenues. Necessities and items with few substitutes are inelastic, while luxuries and products with readily available substitutes are elastic. However, a point is eventually reached where even goods or services once deemed inelastic become more elastic. Substantial price increases eventually force consumer behavior to change and producers to develop substitutes, such as alternative medication in the case of insulin. Eventually, the demand may become elastic, where the percentage change in the quantity demanded exceeds the percentage change in price. Companies know they can increase revenues by raising their prices when they have inelastic demand curves. They are also aware that revenues will decrease if they choose to increase their price on the elastic portion of their demand curve.
Dig Deeper With These Free Lessons:
Price Elasticity of Demand - How Much of a Price Change Would You Tolerate
Demand - The Consumer's Perspective
Changes in Demand - When Consumer Tastes Change
Supply and Demand - Consumers and Producers Reach Agreement
Price Elasticity of Supply - How Producers Respond to a Price Change