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August 29, 2014 

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KEYNESIAN EQUILIBRIUM: The state of the macroeconomy in which aggregate expenditures are equal to aggregate output. This is illustrated using the income-expenditure model, or Keynesian cross, as the intersection of the aggregate expenditures line and the 45-degree line. The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditures equal aggregate output. Keynesian equilibrium is also represented by the saving-investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes, and imports).

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PERFECTLY INELASTIC:

An elasticity alternative in which changes in one variable (usually price) do NOT cause any changes in another variable (usually quantity). Quantity is totally, completely unresponsive to price. Quantity just does not change, regardless of changes in price. This characterization of elasticity is most important for the price elasticity of demand and the price elasticity of supply. Perfectly inelastic is one of five elasticity alternatives. The other four are perfectly elastic, relatively elastic, relatively inelastic, and unit elastic.
AlternativeCoefficient (E)
Perfectly ElasticE = ∞
Relatively Elastic1 < E < ∞
Unit ElasticE = 1
Relatively Inelastic0 < E < 1
Perfectly InelasticE = 0
Perfectly inelastic means that quantity demanded or supplied is unaffected by any change in price. In other words, the quantity is essentially fixed. It does not matter how much price changes, quantity does not budge. Perfectly inelastic demand occurs when buyers have no choice in the consumption of a good. In an analogous way, perfectly inelastic supply occurs when sellers have no choice in the production of a good.

The chart to the right displays the five alternatives based on the coefficient of elasticity (E). In technical shorthand (often used by economists who never learned technical longhand), the coefficient of elasticity (E) is given as:

E = 0

This technical shorthand works for both the price elasticity of demand and the price elasticity of supply.

Two Curves

Perfectly Inelastic Curves

Perfectly inelastic demand and supply are best understood and more easily seen with pictures. The blank graph presented here is ready and willing to display a perfectly inelastic demand curve and a perfectly inelastic supply curve. All that is needed is a click of the corresponding buttons labeled [Demand] and [Supply].

Both of the curves revealed by the button-clicking are vertical, perfectly vertical. This is THE hallmark characteristic of perfectly inelastic. Being perfectly vertical means that, for a given quantity, buyers buy or sellers sell at any price. The focus, in other words, of a perfectly inelastic curve is on quantity not price. For any price the quantity remains absolutely fixed.

How about a couple of examples to illustrate perfectly inelastic demand and perfectly inelastic supply? However, before providing examples, note that use of the word "perfectly" means that the perfectly inelastic alternative is an ideal, theoretical extreme that does NOT actually exist in the real world. As such, the hypothetical, fabricated examples provided here are intended only to illustrate.

Demand

The key for perfectly inelastic demand is that the good has absolutely no substitutes-in-consumption. Buyers either buy the good, or they buy the good. They CANNOT switch to a substitute good if the price gets a little too high. The hypothetical, fabricated example offered for purposes of illustration is Double-Dot Caramel Nougat Clusters. But this is just candy, with thousands of substitutes. How can it have a perfectly inelastic demand?

A ha! There is a trick to this candy. And that trick is the secret ingredient treplobivium HG9. Every Double-Dot Caramel Nougat Cluster contains an ample amount of treplobivium HG9, which not only enhances the flavor of each Caramel Nougat Cluster, but is also THE most addictive substance known to humanity. One taste of treplobivium HG9 and a consumer is hooked for life. Eat it and live. Do not eat and die. Double-Dot Caramel Nougat Clusters are THE ONLY source of treplobivium HG9. This means Double-Dot Caramel Nougat Clusters have NO substitutes-in-consumption. Period!

As such, the demand for Double-Dot Caramel Nougat Clusters is perfectly inelastic. The Double-Dot company can charge any price it wants for Caramel Nougat Clusters, and buyers pay because they have no choice. Raise the price, lower the price, it matters not, the addicted buyers continue to buy. If this sound a lot like illegal narcotics, cigarettes, and alcohol, it should? While these goods do not have perfectly inelastic demand, their addictiveness and lack of substitutes does indicate that they come as close to perfectly inelastic demand as almost any real world goods.

Supply

The key for perfectly elastic supply is that the good has absolutely no substitutes-in-production. In particular, the quantity of the good is fixed. It is not possible to switch resources back and forth between the production of any other goods. Typically this good has been produced already and there is no way to produce any more. In this case, production cost and thus price do not affect quantity. One hypothetical example of perfectly inelastic supply is the macrame tapestries created by the now deceased artist Katerina Kopolov (who was struck dead by a meteor at the age of 26). Katerina created three works of art in total, one depicting the biblical Last Supper, another depicting the last voyage of Columbus, and the third depicting the last television episode of M*A*S*H. Because Katerina is no longer among the living, the quantity of these macrame tapestries is fixed. Production cost and price cannot affect quantity. Quantity is fixed.

As such, the supply of Katerina Kopolov macrame tapestries is perfectly inelastic. Buyers can offer one dollar or one billion dollars, and it does not matter, only three Katerina Kopolov macrame tapestries exist. If buyers should lower the price they offer for Katerina Kopolov macrame tapestries, then three Katerina Kopolov macrame tapestries are supplied. If buyers should raise the price they offer for Katerina Kopolov macrame tapestries, then three Katerina Kopolov macrame tapestries are supplied.

<= PERFECTLY ELASTICPERSONAL CONSUMPTION EXPENDITURES =>


Recommended Citation:

PERFECTLY INELASTIC, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: August 29, 2014].


Check Out These Related Terms...

     | perfectly elastic | relatively elastic | relatively inelastic | unit elastic | elasticity alternatives | elasticity alternatives, demand | elasticity alternatives, supply | inelastic | inelastic demand | inelastic supply |


Or For A Little Background...

     | elasticity | coefficient of elasticity | price elasticity of demand | supply | law of demand | demand curve | price elasticity of demand | supply | law of supply | supply curve |


And For Further Study...

     | elasticity and demand slope | elasticity and supply intercept | demand elasticity and total expenditure | price elasticity of demand | income elasticity of demand | cross elasticity of demand | elasticity determinants |


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