Elastic Demand Vs. Inelastic Demand: What’s The Difference?

While you may have heard the terms elastic and inelastic in reference to economics or a market, it isn’t always clear what it means. Most everyone thinks of elastic as something that you add to clothes to make them stretch, but it also has a different meaning: changeable.

That is the definition that is used when describing demand as elastic. It means that it’s changeable and therefore altered by other factors. Inelastic demand, on the other hand, is static. It doesn’t change depending on the surrounding circumstances.

This means that entertainment goods such as movies, video games, and toys are elastic, while necessities such as food and medicine are inelastic.

Key Takeaways:

What Is Elastic Demand?

Elastic demand is demand that changes depending on the circumstances. What causes an alteration in demand is variable, which means that the circumstances can vary from economic downturns to having a lot of different brands to choose from.

There are five main kinds of elastic demand, as there are five major circumstances that cause the level of demand to change.

1. Price elasticity of demand

   This type of demand is based on the cost of the items. This is the most common type of elastic demand and also the way to determine whether or not an item is actually elastic or not. The determination for this one is that if the price of the item goes up, then demand for it should fall. Conversely, if the price drops, demand for the item should rise.

2. Cross elasticity of demand

   Goods don’t exist in a vacuum. Cross elasticity takes note of this, and it measures how the pricing of one good can affect the demand for others. For instance, if the price of coffee were to rise, then people would try to cut back on it. This would therefore lead to a fall in demand for coffee filters and coffee makers.

   Additionally, if the price of tea didn’t rise as well, there may be a rise in the demand for tea as a substitute for coffee. And that, in turn, would increase demand for tea-related goods, such as kettles and tea infusers.

   The fall in demand for coffee filters and the rise of demand for tea kettles are both examples of cross-demand.

3. Advertising elasticity of demand

   Advertising elasticity of demand looks into how advertising campaigns affect demand. Companies that specialize in advertising are always looking for positive advertising elasticity – an uptick in demand with greater advertising saturation in an area.

   A good advertising campaign can have a positive shift in consumer demand, though, of course, other types of demand elasticity are also in play.

4. Income elasticity of demand

   This type of demand crosses over with price elasticity in a way. The more income a person has, the more likely they are to spend it on items – to a limit, of course.

   Income elasticity is also what drives less expensive goods success, such as generic brands, due to the fact that some people don’t have extra money to spend on some name-brand items.

   Demand will also tend to go up if people get a higher income. Raises are often tied to more money being spent. This is why economic downturns cause elastic demand to crash. People’s incomes go down – or disappear – so they severely limit or stop their buying of elastic goods.

5. Substitute elasticity of demand

   The idea of a substitute is two-pronged. On one side, it’s if several different companies make the same product. Let’s take stereo amplifiers as an example. Yamaha, Sony, and Onkyo all make stereo amplifiers, most of which have similar capabilities.

   You may end up choosing one for a variety of reasons, but it makes the demand for each individual company’s amplifier elastic as you select a substitute.

   It can also be a different but similar item. Take, for instance, buying Colby jack cheese rather than cheddar cheese. There are various reasons that you may make that choice, but the Colby jack cheese acts as a similar substitute to the cheddar cheese.

Goods that have an elastic demand are most often non-necessities. These are items that people can just stop buying if they have to cut back on spending them. Examples are video games, televisions, and craft supplies.

What Is Inelastic Demand?

Inelastic demand is demand that isn’t affected by price changes, income changes, or other demand-altering factors. There are several goods in this category, all of them considered necessities.

There are two major categories of inelastic goods.

1. Necessities.

   Demand for necessary items won’t grow or shrink depending on circumstances. People need a certain amount of them, and they purchase that amount no matter what’s going on (if they possibly can). These include:

   • Food

     While an alteration in economic circumstances may cause some substituting and buying a few less when items are on sale, the overall demand for food isn’t going to change.

     Even if the price drops, the alternation in demand will be negligible – because people aren’t going to suddenly start consuming more food because it’s cheaper.

   • Fuel

     While high gasoline prices will cause people to try to limit driving, there’s still a baseline of demand. People have to get to work, take their kids to school, and go to the grocery store. A baseline of needed fuel is still there.

     The same is true for other types of fuel, such as natural gas. People don’t stop heating their homes just because they have to take a lower-paying job.

   • Clothes

     While there are wide varieties of clothes, it isn’t something that people can do without. Clothing sales tend to stay constant even in economic downturns, though there will be a shift towards less expensive brands.

   • Pet supplies

     While some kinds of pet supplies aren’t necessary, demand for goods like dog and cat food and other necessary items will remain.

2. Items that can’t be substituted.

   Another type of inelastic demand is based on items that can’t be substituted for anything else. The market for these goods will remain constant despite the surrounding environment and personal circumstances.

   • Medicine

     Medicine is twofold in this instance. Not only is there a base demand for it because medicine isn’t something that people can do without, but many medicines have no real substitute.

     There are some like over-the-counter painkillers that can be swapped out – Advil, Aspirin, and Aleve can be substituted for one another – but more specialized medicine can’t be. Especially new types of medicine where there isn’t a generic yet.

   • Alcohol

     There is no direct substitute for alcohol, so demand for alcoholic beverages tends to remain similar. While bars may see some less patronage, alcohol sales, in general, will remain.

   • Tobacco

     Any additive good will maintain its sales despite other economic factors. Tobacco products are no exception to this rule. While there are some substitute options in terms of how the product is consumed – cigars, cigarettes, vape, chewing tobacco – the tobacco itself can’t be substituted.

   • Books

     While demand is likely to drop for novels if the price rises or there’s income elasticity, there is no direct substitute for them. And certain kinds of books – such as textbooks – are necessary for certain circumstances.

   • Electricity

     There is no substitute for energy. Demand for electricity tends to remain fairly constant, taking into account people using more air conditioning in the summer and other similar factors.

There are some inelastic goods that can fall into some of the elasticity types, such as substitute elasticity or cross elasticity. Like the example with the two different types of cheese, for instance. Painkillers can be the same as well – such as choosing Tylenol over Motrin or even the generic.

However, as a whole, neither food nor drug sales are going to be affected by income, price changes, or an advertising campaign.

Elastic Demand vs. Inelastic Demand FAQ

1. How do you determine whether demand is elastic or inelastic?

   The main way to determine whether demand is elastic or inelastic is to see whether or not a demand for it drops if the price rises.

   For an elastic good, it’s pretty much guaranteed that raising the price will lower the demand for it. The reverse is true as well, meaning that if an uptick in demand occurs when the price is lowered, then it’s likely it’s an elastic good.

   There will sometimes be a small burst of purchases for an inelastic good if the price drops, but over time the consumption of it evens out. People will buy extra if it’s a good price – assuming it’s nonperishable – but they don’t consume more of it than they did before.

2. What’s an example of a good with an inelastic demand?

   An example of a good with inelastic demand is medicine. Medicines are often inelastic both in that they’re necessary – you need to take your prescribed medicine daily – but also in that there’s often not a substitute for it.

   In terms of something like insulin, there may be some different brands of it, but it’s not something that can be swapped out for another medicine that’ll do the same thing.

3. Is it better to tax inelastic or elastic goods?

   While it isn’t necessarily better to tax elastic goods or inelastic goods, the burden of the taxes falls more on the consumer with one and the producer with the other.

   With inelastic goods, if they’re taxed, the main burden of that tax is on the consumer, who will buy them steadily no matter what. If taxing elastic goods, the tax falls more on the producer, who has to deal with differences in demand depending on the circumstance.

Author

Di Doherty

Di has been a writer for more than half her life. Most of her writing so far has been fiction, and she’s gotten short stories published in online magazines Kzine and Silver Blade, as well as a flash fiction piece in the Bookends review. Di graduated from Mary Baldwin College (now University) with a degree in Psychology and Sociology.