When building an economic policy about a certain product, two parameters are important: cost and demand. Within the framework of the article, the second is of most interest. Yes, not just, but such a variety as inelastic demand. This is what will be discussed.
What is called inelastic demand
What phenomenon or process is so called? Inelastic demand is a situation where there is a weak reaction to a change in price. It may change several times, but fluctuations in the number of purchases will be interest. With an increase in production total income has a tendency to decrease, while the marginal generally becomes negative. It should be noted that a company that seeks to maximize profits should ignore this situation and adjust the price in order to obtain an equilibrium economic situation.
The value of inelastic demand in the economy
The significance of this phenomenon is rather heterogeneous. On the one hand, it allows us to talk about the ability of companies or a particular industry to adapt to emerging changes in economic life. So, a practical example from life can be given when speaking about the situation with oil. If the government tried to sell it as before, when prices fell, state-owned companies selling these raw materials would quickly lose all their customers. And if there was inelastic demand, it means that the change would not affect the current situation. But in reality, such traders will be left with one oil. This is an example that is not possible with inelastic demand. But what is he then?
If we talk specifically about inelastic demand, then it is observed in many important ways. Among them:
- Electricity.
- Water.
- Heating.
- Food.
How does this all work? The fact is that people have many needs that relate to basic needs. For example, everyone needs to eat. And even if food prices go up several times every day, that is, it will still be necessary, with a certain minimum. In such cases, the demand is inelastic, which will be manifested in the fact that every person still buys food, but in this case its condition and characteristics will deteriorate. The same can be said about water: given its necessity and the inability to live without it, giving up will not work. About it, we can say that there is always an absolutely inelastic demand from consumers for utilities. But everything can have its own nuances that change the state of things. Is it possible to somehow calculate inelastic demand at a price or turn it into elastic? These are rather interesting and interesting questions, the answers to which are difficult to find even in textbooks on economics. But as part of the article, we will try to briefly outline the potential opportunities that open up for people who ask such questions.
How to calculate
First question: is it possible to calculate inelastic demand, like other economic elements? Alas, the answer is no. The fact is that inelastic demand is a process that cannot be calculated. You can increase the cost of a cube of water, sell it by the piece, but the result will be the same - people will not step over a certain minimum necessary for life and minimum comfortable conditions. But not everything is so simple, and on a national scale, inelastic demand can turn into elastic.How? This will be discussed now.
Can inelastic demand turn into elastic
Since it is desirable to take something really existing to describe suitable cases, this situation will be considered on the example of Ukraine and Ukrainian legislation as more suitable than modern Russian realities. So, a group of people who live in a certain territory, own land and water resources. And if the former belong purely nominally, and the possibility of confiscation by the communities is not provided, then the situation is slightly different with the latter.
So, if most residents wish, a water intake tower can be built for their money, which will supply the required amount of liquid. It should be noted that everything is done at the expense of the local population through non-governmental governing bodies (cooperative or limited liability company). Therefore, when deciding to act in a similar way, it may turn out that the demand itself has not changed, but the amount of income taught by the state has fallen.
A similar situation in Ukraine and with energy. Thus, all households that generate electricity (having at their disposal wind or solar power plants) are required to sell its surplus to the state at the so-called “green tariff”. Thus, the level of consumption fixed by the state is falling. And when considering the overall picture, we can say that demand is becoming elastic. Although in fact this is not at all true, because it remains at the same level. And in the end, touching upon such an interesting topic, I want to talk a little about the elasticity of demand in order to better understand its antipode - inelasticity.
Demand elasticity
This indicator is used to measure the customer’s reaction to changes in price characteristics. The main design element is coefficient of elasticity. Independent variables used in the calculations:
- The price of the product that interests.
- Prices of other goods.
- Nominal income.
Conclusion
The article considered what inelastic demand is, what it is and why it is important for the population. The mechanisms why it is called that were considered. It also describes the ability of the population to influence the fact that it becomes an elastic demand for state statistics.