Perfectly inelastic demand is when the quantity demanded is unresponsive to the price change. Changes in the price of a product don’t affect the quantity demanded to rise or fall. When the price rises, demand will remain the same. Vice versa, when the price drops, the quantity demanded remains unchanged.
In a graph, the demand curve will form a vertical line. The value of own-price elasticity of demand is zero.
What is the own-price elasticity of demand?
The own-price elasticity of demand is the ratio between the percentage change in quantity demanded of a product and the percentage change in its price. We can write it in the following mathematical formula:
Own-price elasticity of demand (OPE) = % Change in the quantity demanded of Product X (%ΔQ) / % Change in the price of Product X (%ΔP)
Demand is perfectly inelastic when the value of % ΔQ equals zero when the price changes. Therefore, the OPE value will be zero. What does it mean?
Zero own-price elasticity shows you that any change in price doesn’t affect the quantity demanded. Hence, when you raise the selling price significantly to maximize your revenue, consumers still demand the same amount of product.
Why do you have to know the perfectly inelastic demand?
As we explained before, when demand is perfectly inelastic, it shows you that the price change doesn’t matter. Consumers will buy the same amount of goods or services at each price.
Take, for example, diabetes medications. Without drugs, diabetics will die. So, even though the price of diabetes medicine goes up, sufferers still ask for it.
In contrast, when prices fall, it won’t necessarily increase demand for diabetes drugs. The patient is at risk of overdosing when he consumes more than necessary.
When faced with perfectly inelastic demand, the company should raise prices. Raising prices will always lead to total revenue to increase.
But, sometimes, the government intervenes and forces producers not to do so. It has an interest in keeping drug prices affordable.
How does demand become perfectly inelastic
Demand for goods is perfectly inelastic when:
- Substitutes are unavailable. Thus, there is no choice for consumers to switch to alternatives when prices rise.
- Vital for survival. Consumers will buy goods if the alternative is death. For example, when you are in a desert and water supply is scarce. You will pay whatever the price of water if it saves your life.