Difference Between Elastic and Inelastic Demand

Edited by Diffzy | Updated on: July 04, 2023

       

Difference Between Elastic and Inelastic Demand

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Introduction

The price a client is willing to pay for a product at a specific showcase cost is called the demand. It is generally understood that requests are matters of a want or a craving. But in financial matters, the demand is all around the amount and at what cost that amount is being requested. Cost and client play an important part in characterizing the request. The demand that is now understood can be divided into two groups, such as elastic demand and inelastic demand. we will discuss the changes in the quantity demanded or to be precise the "degree" at which extension or contraction occurs in demand. That change in the quantity demanded at a given change in the own price of a commodity is known as price elasticity of demand. The change can be expressed as a percentage change in the quantity demanded as well as own price of the commodity.

Elastic vs Inelastic Demand

The demand is said to be elastic if the change in the quantity demanded for a product is more than the change in price of that product both in terms of percentage change. While demand is inelastic if the same is less than the change in the price of commodities in terms of percentage. Elastic demand encompasses luxury goods and services, whereas inelastic demand pertains to fundamental necessities involving nourishment, housing, clothing, and many more. The demand curve for the elastic demand is slightly shallow while compared to the inelastic demand which is quite steep and vertical. The recession or depression in the economy may affect the products and services that carry elastic demand while having zero impact on the goods having inelastic demand. The appetite for goods and services that tend to have the highest number of options accessible and is said to be flexible, in contrast to the request for goods and services without alternatives being available is said to be inelastic.

Difference Between Elastic Demand And Inelastic Demand In Tabular Form

Parameters of ComparisonElastic DemandInelastic Demand
MeaningWhen there's the slightest change in the price of the goods or niceties then there will be a big difference in the quantity demanded by customers. This is known as elastic demand.When the quantity demanded by an end user does not cause substantial fluctuations in the cost of the products, this can be referred to as inelastic demand.
Demand curveThe demand curve is shallow.The demand curve is steep.
Quotient of elasticityThe elasticity of demand is more than 1 or equal to one. E>1 or E=1.The inelasticity of demand is less than one. E<1.
CommoditiesLuxury goods such as gold and big brands.The good that satisfies a person's fundamental needs
Income and priceIncome and expenses are opportunities for each other.The income and expenses are in the same direction.

What is Elastic Demand?

The demand elasticity attributable to price is the most well-known type. Price elasticity is the metric used to evaluate the relationship between the percentage change in the quantity required and the commodity's own price. It is always expressed as a %, and if it is not, then the changes will not be as predicted. It is consistently displayed as greater than one, such as E>1.

In a market, there are substitutes available for almost every good. One is lucky if his product has few to no substitutes available. The substitute product has a direct impact on the elasticity of demand. The higher the number of substitute products greater the elasticity of demand. Only luxury goods or products that can be used as a substitute for them that have high elastic properties are widely available. Automobiles, flight tickets, furniture, coffee, cosmetics, and clothing will have an elastic demand. It is possible to find the product's close equivalents or less expensive alternatives with ease.

An example of elastic demand would be a trader selling packaged flour at Rs 1,500/kg while another trader sells the same at Rs 1,000/kg. The customer will be attracted to the shopkeeper selling at a lower price. No one would be ready to pay an extra amount for the flour. This will lead to an elastic demand.

For elastic commodities, a market downturn or recession may have either a favorable or unfavorable effect.

Characteristics Of Elastic Demand

  • The goods that give elastic demand are the luxurious goods that have high value in the market.
  • If the prices went up, consumers of the products would decline or switch to other products.
  • Close substitutes for the products can be found everywhere.
  • It can impact the budget of the consumer in case of a price rise situation.
  • The market for the goods is very competitive which leads to more elastic demand.

Following are some of the commodities or factors   which will have an elastic demand

Clothing Sector

In this area, the market trend can shift quite quickly. The industry is perpetually in demand and never goes out of style, therefore it is in great demand all year. Clothing is a cost borne by the customer. This sector of the economy has a substitute market, which results in elastic demand. The demand for clothing is influenced by consumer trends and preferences, and the sector is very dynamic and ever-evolving.

Substitute Product

Substitute products represent those items or amenities for which an equivalent substitute is readily available. Tea and coffee are typical examples of possible substitute items, as are ballpoint pens and gel pens, etc. When the retail cost of the goods or services rises, the consumer will promptly switch over to the market's alternative offering.

Goods Having Multiple Uses

The demand for goods which multiple uses will have an elastic demand. Such goods are electricity. Electricity can be used for multiple uses.

Durable Goods

These are those goods that the consumer is habitual in buying but can skip the purchase if the prices touch the sky. Such goods are automobiles, washing machines, etc.

What Is Inelastic Demand?

The elasticity is always measured by how the price of goods is sensitive to the change in the percentage of quantity demanded by the customers. If the demand by the customers of a good is less compared to the change in price of goods and services in terms of price then the situation is referred to as the inelasticity of demand. In simpler words, we can say that the demand will be inelastic if the customer is willing to pay more price for the same commodities. The necessities of life that cannot be bargained for are what we're referring to here. The customers have to pay the price prevailing in the market.

One of the important factors for such a lower elasticity of demand is that the customers cannot find easy substitutes for the product. There are no substitute products available in the market so customers are obliged to pay the definite and fixed amount for the same quantity of the product. The manufacturer or the supplier of goods and services is the single seller or he has the monopoly over the market.

Inelastic demand can be calculated by dividing the percentage change in quantity demanded by the percentage change in the price of a commodity. Also, the recession and depression in the economy of a country may not have an impact on the goods. It will either have no impact or zero. The market situation will not be miserable.

Let's assume that the Indian government keeps on increasing the taxes on cigarettes and tobacco products which as an outcome give rise to the prices of cigarettes and tobacco products. Still, the public pays the offered market price to purchase the product. What can be the reason for that?

The reason is very simple which is as follows:

  • The consumers of cigarettes and tobacco products are habitual. They are ready to make a purchase when the prices are high.
  • Secondly, there is no close substitute market or product available for cigarettes and tobacco products.

So through the help of an example, it is very clear that cigarettes and tobacco products will show an inelastic demand in the market. As the consumers of these products are habitual and they are not going to stop the consumption of the products because of the increase in the price margin of the product. They find it difficult to stop consumption just because of the changing price. Consumers are not only habitual of consuming the product rather they are addicted to the product.

Characteristics Of Inelastic Demand

  • The goods or services that show inelastic demand are the basic requirements of life such as rice, flour, and water.
  • Even if the prices of the commodities are increased, consumers will still pay the price for the quantity demanded at that increased price.
  • The graphical representation of the inelastic demand will be shown as a straight line.
  • Demand for the products remains the same irrespective of the change in the price of products.
  • The supplier has a monopoly in the market which creates an inelastic demand.

Main Difference Between Elastic And Inelastic Demand (in Points)

  • The change in the quantity demanded is greater than the change in the price of a commodity is said to be elastic demand. While the change in quantity demanded is lower than the price change is termed inelastic demand.
  • The curve for elastic demand is shallow as compared to the curve for inelastic demand which is vertical.
  • The quotient of elasticity of elastic demand is more than 1 whereas the quotient of elasticity of inelastic demand is less than 1.
  • The elastic demand includes the products of luxury and comfort whereas the inelastic demand includes the products of necessities.
  • The close substitutes of products are available in the elastic demand while there are zero or few substitutes available in the inelastic demand.
  • The price and revenue move in opposite directions in elastic demand whereas the revenue and the cost move in the same direction in an inelastic demand.
  • The demand for items of comfort and luxury is elastic, whereas the demand for items of necessity is inelastic.

Following are some of the important factor that defines the elasticity of demand

The Market For The Product

If the seller has a monopoly in the market the products will have an inelastic demand. Similarly, if the product is homogeneous then the demand will be elastic.

Income Or Budget Of A Customer

Income plays a crucial role in determining the elasticity of demand. If the change in price forces customers to switch the product it will be due to elastic demand. If customers still purchase the product even if it affects the budget then the demand will be inelastic.

Time Horizon

Although the demand may be inelastic in the short term, if consumers continue to make the same purchasing decisions over time despite having access to a wide range of options, the demand will eventually become elastic.

Loyalty

A loyal customer will create an elastic demand, whereas if the customer is very easy to switch off the product, there will be an inelastic demand. A businessman needs to maintain customer loyalty who does not switch from one brand to another when there is a predicament changing prices in the market.

 For an Entrepreneur, maintaining customer loyalty is crucial in ensuring the demand for their product remains elastic.

Conclusion

From the discussion cited above, it can be concluded that both elastic and inelastic demand contribute significantly to the elasticity of demand. Notwithstanding their distinct characteristics, each possesses equally significant roles. The market has substitute goods and complementary goods available which duly affect the elasticity of demand. The products having substitute products will have elastic demand consequently, goods with no substitute available have inelastic demand. Consumers tend to believe they have a variety of options available without compromising their income. But it's just an assumption as for the necessities of life goods have inelastic demand.

Therefore, given the facts so far, there is indeed elastic demand for products for which close substitutes are available. On the other hand, demand for goods and services like railroads with few alternatives available is inelastic.


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"Difference Between Elastic and Inelastic Demand." Diffzy.com, 2024. Mon. 15 Apr. 2024. <https://www.diffzy.com/article/difference-between-elastic-and-inelastic-demand>.



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