- Elastic demand, which is when the quantity demanded changes more than the price does.
- Unit elastic demand, which is when the quantity demanded changes exactly in unison with price changes.
Demand elasticity is measured by comparing the percentage change of the quantity demanded to the percentage change of the price. Therefore, if the quantity demanded changes the exact same percent as the change in price, the ratio would be 1. In other words, if the price dropped 10%, and the quantity demanded increased 10%, then the ratio would be .1/.1 = 1. (Because demand is known to move inversely to price, you can ignore the plus and minus signs.) This is known as being unit elastic.
Elastic demand is when the quantity to price ratio is more than 1. In other words, if the price dropped 10%, and the quantity demanded rose 50%, then the ratio would be .5/.1 = 5.
A the other extreme, if the price dropped 10% and the quantity demanded didn't change, then the ratio would be 0/.1 = 0. This is known as being perfectly inelastic. Therefore, inelastic demand occurs when the ratio of quantity demanded to price is between zero (perfectly inelastic) and one (unit elastic).
Inelastic Demand CurveYou can also tell whether the demand for something is inelastic by looking at the demand curve. Since the quantity demanded doesn't change as much as the price, it will look steep. In fact, it will be any curve that is steeper than the unit elastic curve, which is a diagonal. The more inelastic the demand, the steeper the curve. If it's perfectly inelastic, then it will be a vertical line. That's because the quantity demanded won't budge, no matter what the price is.
Of course, in real life there is no example of something where the demand is perfectly inelastic. If that were the case, then the supplier could charge an infinite amount and people would have to buy it. The only thing that would come close would be if someone managed to own all the air, or all the water, on Earth. There is no substitute for either, and people have to have air and water or they die in a short period of time. However, even that's not perfectly inelastic, because the supplier couldn't charge 100% of the income in the world. People would still need some money for food, or they would starve within a few weeks. Therefore, it's hard to imagine a situation that would truly create perfectly inelastic demand.
However, there are some products that come close. For example, gasoline is something that drivers need a certain amount of each week. Gas prices can change every day. If there is a shortage, the prices will skyrocket. People will still buy gas, because they can't change their driving habits very quickly. To shorten your commute time, you'd need to change jobs, which takes awhile. You've got to get groceries at least weekly. You might go to a store that's closer, but you'll put up with slightly higher prices before you change your habits.