Perfectly Inelastic Demand

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Definition of Perfectly Inelastic Demand:

A perfectly inelastic demand is a demand where the quantity demanded does not respond to price.

Detailed Explanation:

There are very few examples of goods or services with a perfectly inelastic demand curve. Insulin is a common example. A diabetic’s demand curve for insulin is almost vertical or perfectly inelastic. The implication of a perfectly inelastic demand curve is that price does not matter; the consumer would purchase the same amount of a good or service no matter its price. A person with diabetes must have a specific amount of insulin. Without it, the diabetic dies, but if the person with diabetes takes more insulin than necessary, he or she risks overdosing. A business selling a good with a perfectly inelastic demand curve is a price maker because the quantity demanded of insulin would not be affected by a significant increase in its price.

Life-saving drugs like insulin have nearly perfectly inelastic demands, especially if there is no substitute for the medication. Fortunately, pharmaceutical companies have developed alternatives, so the demand curve for insulin is more elastic than when insulin was first used. Graph 3 is for a product with a perfectly inelastic demand curve. The quantity demanded equals Q1 at all prices.


Graph of a perfectly inelastic demand curve.

In contrast, a perfectly elastic demand curve is horizontal. Businesses selling a product with a perfectly elastic demand curve must accept the market price. If the company raised its price, it would not sell any of its goods or services because there are too many competitors offering the same product at the market price, which would be lower. The company would sell all it produced at the market price, so there is no incentive for the business to lower its price to increase sales. Typically, companies with a perfectly elastic demand curve are small producers producing identical goods and services, such as most agricultural products. Most farmers operate in what economists refer to as perfectly competitive markets. These companies are price takers because they have no impact on the price of a product. In other words, companies must “take it or leave it,” meaning that they either accept the market price or choose not to sell their product. For example, individual farmers cannot negotiate their prices when bringing their produce to market. They must accept the market price. A produce farmer who tries to negotiate a higher price would have to discard many unsellable rotten vegetables! A farmer who lowers the price would be leaving some money on the table.  

Dig Deeper With These Free Lessons:

Price Elasticity of Demand – How Do Consumers Respond to Price Changes
Demand – The Consumer's Perspective
Supply and Demand – Producers and Consumers Reach Agreement

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