What does it mean for supply to be inelastic?

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Definition of Inelastic Supply:

A good or service has an inelastic supply when the percentage change in the quantity supplied is less than the percentage change in price. In most cases, the provider is limited in how quickly it can respond to a price change.

Detailed Explanation:

Flexibility in the manufacturing process is an important factor in determining whether a company has an elastic or inelastic supply curve. Companies producing a good or service with an elastic supply can respond quickly to a change in price. The mathematical formula for the elasticity of supply is: 

What does it mean for supply to be inelastic?

An inelastic supply curve has a price elasticity of supply that is less than one. Compare the supply curves below. The more inelastic supply curve is steeper and a change in price has a much smaller impact on the quantity supplied than for the elastic supply curve.

What does it mean for supply to be inelastic?

Factors that influence the elasticity of supply include: 

Time: Long-term supply curves are more elastic than short-term curves because of the flexibility that time provides to respond to market changes. For example, assume a community experiences a sudden increase in rent. The increase may not generate an immediate increase in housing. It takes time for homeowners to up-fit apartments or build apartment buildings. 

Availability of Inputs: If a company needs to search or wait for inputs its supply is more inelastic than a company that has the inputs readily available. For example, compare a lawn mowing service with a hospital. The lawn mowing company would probably be able to hire additional workers in a few weeks since the work requires little skill. A hospital may take months to identify and negotiate with a highly qualified surgeon. In this case, the lawn mowing company has a more elastic supply curve than the hospital.

Ease of Storage: Some companies can increase their elasticity of supply by stockpiling parts or the final product so they can respond quickly to a price increase. Other companies do not have that flexibility. Producers that manufacture a good that is perishable or has an input that has a short shelf life are unable to store their final product or inventory parts as readily as other companies. 

Capacity: A company that has excess capacity has a more elastic supply curve than a company that is producing at capacity because it is much easier for it to increase production than it would be for a company near capacity that may need to hire more workers or purchase additional equipment to increase output.

Dig Deeper With These Free Lessons:

Price Elasticity of Supply – How Does a Producer Respond To a Price Change
Supply – The Producer's Perspective
Factors of Production – The Required Inputs of Every Business
Price Elasticity of Demand – How Do Consumers Respond to Price Changes

"Inelastic" is an economic term referring to the static quantity of a good or service when its price changes. Inelastic demand means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.

  • "Inelastic refers" to the static quantity of a good or service when its price changes.
  • Inelastic demand means that when the price of a good or service goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.
  • A perfectly inelastic good would be one where demand does not change regardless of the price; however, no such good or service is perfectly inelastic.
  • Inelastic stands in contrast to elastic, where the latter witnesses significant changes in demand when the price changes.
  • Essential items, such as medication, are considered to be inelastic, whereas luxury items, such as cruise trips and high-end watches, are considered elastic.

Inelastic means that a 1% change in the price of a good or service has less than a 1% change in the quantity demanded or supplied.

For example, if the price of an essential medication changed from $200 to $202, a 1% increase, and demand changed from 1,000 units to 995 units, a less than 1% decrease, the medication would be considered an inelastic good.

If the price increase had no impact whatsoever on the quantity demanded, the medication would be considered perfectly inelastic. Necessities and medical treatments tend to be relatively inelastic because they are needed for survival, whereas luxury goods, such as cruises and sports cars, tend to be relatively elastic.

The demand curve for a perfectly inelastic good is depicted as a vertical line in graphical presentations because the quantity demanded is the same at any price. Supply could be perfectly inelastic in the case of a unique good such as a work of art. No matter how much consumers are willing to pay for it, there can never be more than one original version of it.

The formula for inelastic demand is:

Inelastic Demand = % change in the quantity demanded/ % change in price

A value less than 1 indicates inelasticity

For example, if the price of a good went from $5 to $8 (60%) and the demand went from 100 units to 70 units (30%), the value is 30/60 = 0.5, meaning the good is inelastic.

There are no examples of perfectly inelastic goods. If there were, that means producers and suppliers would be able to charge whatever they felt like and consumers would still need to buy them. The only thing close to a perfectly inelastic good would be air and water, which no one controls. 

Economic recessions and depressions tend to hurt the demand for elastic goods while having little to no impact on inelastic goods.

But there are some products that come close to being perfectly inelastic. Take gasoline, for instance. These prices change frequently, and if the supply drops, prices will jump. People need gas to drive their cars, and they’ll still need to buy it because they may not be able to alter their driving habits, such as commuting to work, going out with friends, taking the kids to school, or going shopping.

These could change, like changing your job for another one closer, but people will still purchase gas—even at a higher price—before making any sharp, drastic changes to their lifestyles. 

By way of contrast, an elastic good or service is one for which a 1% price change causes more than a 1% change in the quantity demanded or supplied. Most goods and services are elastic because they are not unique and have substitutes. If the price of a plane ticket increases, fewer people will fly.

A good would need to have numerous substitutes to experience perfectly elastic demand. A perfectly elastic demand curve is depicted as a horizontal line because any change in price causes an infinite change in the quantity demanded.

The inelasticity of a good or service plays a significant role in determining a seller's output. For instance, if a smartphone producer knows that lowering the price of its newest product by 5% will result in a 10% increase in sales, the decision to lower prices could be profitable; however, if lowering smartphone prices by 5% only results in a 3% increase in sales, then it is unlikely that the decision would be profitable.

Inelastic demand refers to the demand for a good or service remaining relatively unchanged when the price moves up or down. An example of this would be insulin, which is needed for people with diabetes. As insulin is an essential medication for diabetics, the demand for it will not change if the price increases, for example.

Elastic demand refers to the demand for a good or service changing significantly when the price moves up or down. For example, if the total cost of a vacation to a specific destination increases by 20%, including airfare and accommodation, the demand for that vacation will decrease amongst consumers, especially those that are priced out, as there are other cheaper options for vacations.

Common inelastic goods include petrol, salt, water, products/services sold by monopolies, cigarettes, and diamonds.

Inelastic refers to the static quantity of a good when its price changes. When the price of a good or service changes and the quantity demanded of that good does not significantly change, the good or service is considered inelastic.

Companies walk a fine line between pricing a good or service and ensuring demand stays high. The demand for luxury items is more susceptible to changes in price while the demand for essential items is not. Companies must consider these factors when pricing their goods.