Inelastic demand refers to products where demand does not fluctuate based on price or supply. It is rare and differs from standard economic theory where supply and demand move along a given demand curve based on price. Inelastic demand exists for limited products where people will pay any price for it.
Inelastic demand is a term used in economics to refer to a product in which demand does not fluctuate based on price or supply. It differs from the vast majority of commodities, where supply and demand move along a given demand curve based on price. There are a few limited products to which inelastic demand applies.
In standard economic theory, there is a supply and demand curve. According to this curve, as the supply of a product increases, the demand for the product will decrease in relation to the available supply. Thus, sellers will be forced to lower their prices to shift their supply, thus driving up demand once the price is lower.
According to free market principles, the theory of supply and demand suggests that every product will eventually be sold for its optimal price. This is sometimes referred to as Pareto optimal. The basic argument that most economists make in favor of a free market system is that the supply and demand curve should be allowed to decide the price, since both the seller and the buyer will then be in the better situation where supply and demand meet.
For example, suppose a toaster oven goes on the market for $100 United States Dollars (USD). Only those who really want the toaster will be willing to pay that much. As a result, supply may exceed demand and manufacturers will have to lower the price of the toaster.
If the toaster goes on sale for $1 USD, on the other hand, people will buy the toaster even if they don’t want or really need it since the price is so low. Demand will likely outstrip supply. Thus, the manufacturer will raise the price. Eventually, the price will stabilize at the most optimal point where suppliers can make the most profit on a given unit without reducing demand so much that they end up making less because fewer people buy.
For some products, however, demand is inelastic. Inelastic demand refers to those products where people want the item so badly, that they will pay any price for it. Therefore, the demand is unaffected by the price and the demand does not decrease. The supply and demand curve has a zero slope and the optimal price will never be reached.
Inelastic demand does not exist for many products. A life-saving drug is an example of a product for which there would be inelastic demand. Such a demand would exist for that particular product because people would pay the cost no matter how high it was and as such the manufacturer could charge for what they liked.
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