key term - Perfectly inelastic demand

Definition

Perfectly inelastic demand refers to a situation where the quantity demanded of a good remains constant regardless of changes in its price. This means that consumers will purchase the same amount of the good no matter how high or low the price goes, indicating that the good is a necessity with no close substitutes. In this scenario, the demand curve is represented as a vertical line on a graph, reflecting that price fluctuations do not influence the quantity demanded.

5 Must Know Facts For Your Next Test

1. In perfectly inelastic demand, the price elasticity coefficient equals zero, indicating no responsiveness to price changes.
2. Examples of perfectly inelastic goods often include life-saving medications or essential services, where consumers have no choice but to buy regardless of price.
3. A perfectly inelastic demand curve is represented graphically as a vertical line, highlighting that quantity remains unchanged despite price variations.
4. Perfectly inelastic demand is a theoretical concept; in real markets, few goods exhibit this level of insensitivity to price changes.
5. Government interventions, such as price controls on essential goods, can create situations where demand appears perfectly inelastic as consumers cannot react to market prices.

Review Questions

• How does perfectly inelastic demand differ from elastic and inelastic demand?
  • Perfectly inelastic demand is unique because it indicates that quantity demanded remains unchanged regardless of price fluctuations, which contrasts with elastic and inelastic demand. In elastic demand, a small change in price leads to a significant change in quantity demanded, while inelastic demand results in a smaller change in quantity for a price change. This distinct lack of responsiveness in perfectly inelastic demand illustrates how critical certain goods are for consumers.
• Discuss an example of a good that would likely demonstrate perfectly inelastic demand and explain why.
  • A classic example of perfectly inelastic demand is life-saving medications for chronic conditions. Patients who rely on these medications will continue to purchase them regardless of price increases because their health depends on it. The lack of substitutes and the necessity of these drugs highlight why demand remains constant despite changes in cost, showcasing the concept of perfectly inelastic demand effectively.
• Evaluate the implications of perfectly inelastic demand on market pricing strategies for essential goods.
  • Understanding perfectly inelastic demand allows businesses and policymakers to strategize pricing for essential goods effectively. For instance, companies might take advantage of their ability to raise prices without losing sales volume, particularly if they are providing life-saving products. However, this can also lead to ethical concerns about price gouging during emergencies. Policymakers may need to consider regulations or subsidies to ensure that essential goods remain accessible to consumers even when prices rise substantially.

Related terms

inelastic demand:

Inelastic demand occurs when the quantity demanded changes by a smaller percentage than the percentage change in price, indicating that consumers are relatively unresponsive to price changes.

elasticity of demand: Elasticity of demand measures how much the quantity demanded of a good responds to changes in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

necessity goods: Necessity goods are products that consumers consider essential for their daily lives, leading to consistent demand even when prices increase.