Inelasticity and elasticity of demand refer to the degree to which supply and demand respond to a change in another factor, such as price, income level or substitute availability. If the change in demand for a given product corresponds closely to a change in one of these factors, the demand is considered to be elastic. If the change in demand for a given product does not correspond closely to a change in one of these factors, the demand is considered to be inelastic.
Price is the most common factor used when determining elasticity, so we will use it here for our comparison.
How Elasticity is Calculated and Graphed
The elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price. If the elasticity quotient is greater than or equal to one, the demand is considered to be elastic. If the elasticity quotient is less than one, the demand is considered to be inelastic. When the data is graphed, elasticity of demand has a negative slope. An elastic demand is displayed as a more horizontal, or flatter, slope. An inelastic demand is displayed as a more vertical, or steeper, slope.
Inelastic and Elastic Product Examples
The most utilized example of a product with inelastic demand is salt. The human body requires a specific amount of salt per pound of body weight. Too much or too little salt could cause illness or even death. Therefore the demand for salt changes very little with the price. Salt has an elasticity quotient close to zero and a steep slope on a graph.
A common example of an elastic product is gasoline. As the price of gas increases and falls with the international market, the demand (the distance driven by the population) rises and falls in near direct correlation. Gasoline has an elasticity quotient of one or greater and has a flatter slope on a graph.
(For related reading, see: What is the effect of price inelasticity on demand?)