What is Perfectly Inelastic Demand?
Definition: Perfectly inelastic demand is an economic situation whereby, demand and supply is not in any way influenced by pricing. In a perfectly elastic market, the demand and supply never changes even with erratic changes in pricing.
Inelastic refers to the static quantity of supply and demand, even with price fluctuation. In such situations, consumers’ buying habits remain the same even with changes in prices. Likewise, a 1% change in the price of underlying items or services has less than 1% change in the quantity demanded.
Perfectly Inelastic Demand Examples
Necessities and medical products and treatments are synonymous with perfectly inelastic demand situations. With medical products and treatments, patients would always be willing to spend regardless of prices ticking higher. Similarly, consumers would always be ready to spend on basic needs.
This type of economic situation occurs in a market that does not have alternatives. In this case, consumers are often forced to contend with one product or supplier for a given service. The supplier, in this case, operates a kind of monopoly due to lack of alternatives or competition.
Perfectly Inelastic Demand Curve
The demand curve for a perfectly inelastic demand economic appears as a vertical line in graphical representation.
In the chart above, the vertical line QoD represents demand. In its purest form, it is clear that demand remains the same, even with an increase in price. Likewise, demand would remain the same even with a decline in price.
In reality, there is no perfectly inelastic demand. If it existed, producers and suppliers would be able to charge whatever they felt like. However, there are products and services that come close to depicting the perfectly inelastic situation
Gasoline, for instance, is an essential commodity that consumers cannot do without and would always be willing to purchase even on prices ticking higher. Demand for gasoline is always there, as people must move from one place to another using cars or trains.
Inelasticity plays an important role when it comes to the pricing. For instance, a producer could increase supply into the market if a 1% decrease in price is sure to result in a 10% increase in sales. Likewise, the producer might have to lower the production process if a decline in price is expected to result in subdued demand.
By way of contrast, perfectly inelastic differs a great deal from perfectly elastic demand. In perfect elastic condition, price changes affect the supply or demand for goods and services significantly. Similarly, a 1% change in price can result in more than 1% change in supply and demand.
Likewise, a perfectly elastic demand curve appears as a horizontal line in graphical representations. The chart, in this case, indicates that demand can increase to infinity as long as the price remains the same.
Perfectly Inelastic Demand Factors
One of the factors that affect the demand for products in an inelastic demand condition is the price of the alternatives. Reducing the prices of a product relative to alternatives can go a long way in fueling demand.
An increase in income of a given target market can also go a long way in fueling demand for products due to an increase in disposable income, Tastes and expectations are other factors that influence prices and conversely affect demand in a perfectly inelastic market condition.
Summary
Perfectly inelastic demand is an economic situation when a change in price has no influence customers purchasing decisions.In this case, customers purchase what they are used to, regardless of the underlying price increasing or decreasing. Such economic conditions occur where buyers don’t have a choice in terms of alternatives.