Question

Draw a graph of a perfectly inelastic demand curve. Think of a product that would have a perfectly inelastic demand curve. Explain why demand for this product would be perfectly inelastic.

Short answer

A perfectly inelastic demand curve is depicted as a vertical line on an XY graph. An example of a product with perfectly inelastic demand could be insulin due to its absolute necessity to those who need it. The price is irrelevant in this case as the quantity demanded remains constant.

Step-by-step solution

Draw the Graph

Start by drawing a vertical line on an XY graph - where 'Quantity' is on the X-axis and 'Price' is on the Y-axis. Label this line as 'Demand'. Note that a perfectly inelastic demand curve is completely vertical indicating that the quantity demanded remains the same regardless of price changes.

Identify a Product

A product with perfectly inelastic demand could be essential medicines like insulin for diabetics. This is because these items are absolutely necessary, regardless of their prices, so the demand for them remains constant.

Explain the Inelasticity

Explain why the demand for this product is perfectly inelastic. In the chosen example of insulin, the demand is perfectly inelastic because diabetes patients depend on it to survive. Regardless of its price, the quantity demanded remains the same because without it, the consequences could be life-threatening.

Key concepts

Inelasticity in Economics

In the realm of economics, inelasticity refers to the responsiveness, or lack thereof, of consumers when the price of a product changes. An inelastic demand means that the quantity purchased by consumers does not change significantly with price fluctuations. This concept is vital as it helps businesses and policymakers understand how price changes can affect sales volumes and revenue. Products that are inelastic in demand are usually those that consumers consider necessities or for which there are no close substitutes.

For instance, essential goods like basic food items, salt, or utilities such as water and electricity tend to have inelastic demand because people need them for daily living. When understanding inelasticity, it is crucial to acknowledge that it is a matter of degree rather than a binary characteristic. Thus, while no good is perfectly inelastic or perfectly elastic, some goods come close to these extremes under certain conditions.

Demand Curve Analysis

Demand curve analysis involves assessing the graphical representation of the relationship between the price of a good and the quantity demanded by consumers. In a standard demand curve, the price is plotted on the vertical axis (Y-axis), while the quantity is plotted on the horizontal axis (X-axis). The slope of the demand curve indicates the price elasticity of demand, with a steeper curve representing inelastic demand.

The analysis of demand curves is fundamental in both microeconomic theory and practical market analysis. It provides insights into consumer behavior, helping economists and businesses make predictions about how changes in price might influence market demand. Understanding where a product lies on the spectrum of elasticity can influence pricing strategy, marketing efforts, and inventory management.

Essential Medicines Economics

The economics of essential medicines, such as life-saving drugs and vaccines, are often associated with inelastic demand. These are products for which demand remains constant despite significant price changes. Patients requiring essential medicines will generally continue to purchase them even if the price rises, as these medications are crucial for health and survival.

In the context of essential medicines, economic analysis may sometimes entail considering the impact of public policy, insurance coverage, and ethical considerations. For example, governments may implement price controls or offer subsidies to ensure that such medicines are affordable and accessible to all who need them. This highlights the interplay between economic concepts and real-world healthcare challenges, where supply and demand are influenced by more than just market forces but also by ethical imperatives and policy decisions.

Price Elasticity of Demand

Price elasticity of demand is a measure of how much the quantity demanded of a good changes in response to a change in its price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Elasticity is an essential concept because it helps determine how a change in price will affect total revenue for a company.

If demand is elastic, consumers are sensitive to price changes, meaning that an increase in price causes a significant decrease in quantity demanded. Conversely, if demand is inelastic, quantity demanded is relatively unaffected by price changes. For perfectly inelastic demand, there is zero elasticity; quantity demanded does not change at all with price changes. This is theoretically represented by a vertical demand curve on a graph, reflecting how critical certain goods are for consumers, making them non-negotiable purchases despite price levels.