Monday  August 12, 2024
 AmosWEB means Economics with a Touch of Whimsy!
 ASSUMPTION: An initial condition or statement that sets the stage for an analysis by abstracting from the real world. Assumptions are important to economic theories and economic analysis. Some assumptions are used to simplify a complex analysis into more easily manageable parts. These establish idealistic benchmarks that can be used to evaluate real world conditions. Other assumptions are used as control conditions that are subsequently changed to evaluate the effect of the change. The use of ceteris paribus assumptions in comparative statics analysis is an excellent example.

RELATIVELY INELASTIC:

An elasticity alternative in which relatively large changes in one variable (usually price) cause relatively small changes in another variable (usually quantity). In other words, quantity is not very responsive to price. Quantity does change, but not much, in response to large changes in price. This characterization of elasticity is most important for the price elasticity of demand and the price elasticity of supply. Relatively inelastic is one of five elasticity alternatives. The other four are perfectly elastic, perfectly inelastic, relatively elastic, and unit elastic.
AlternativeCoefficient (E)
Perfectly ElasticE = ∞
Relatively Elastic1 < E < ∞
Unit ElasticE = 1
Relatively Inelastic0 < E < 1
Perfectly InelasticE = 0
Relatively inelastic means that relatively large changes in price cause relatively small changes in quantity. In other words, quantity is not very responsive to price. More specifically, the percentage change in quantity is less than the percentage change in price. Relatively inelastic demand occurs when buyers can choose from among a small number of imperfect substitutes-in-consumption. In an analogous way, relatively inelastic supply occurs when sellers are able to produce goods only by switching resources among a small number of imperfect substitutes-in-production.

The chart to the right displays the five alternatives based on the coefficient of elasticity (E). In technical shorthand (typically used by economists who were originally trained as court stenographers), the coefficient of elasticity (E) is given as:

0 < E < 1

This technical shorthand works for both the price elasticity of demand and the price elasticity of supply, because the negative value of the price elasticity of demand is ignored. If the negative sign on the price elasticity of demand is not ignored, then relatively inelastic demand is specified as -1 < E < 0.

### Two Curves

Relatively Inelastic Curves

Like many economic concepts, relatively inelastic demand and supply are better understood with graphs. The blank graph presented here is poised and eager to display a relatively inelastic demand curve and a relatively inelastic supply curve. It will do this when the corresponding buttons labeled [Demand] and [Supply] are clicked.

The most notable note worth noting is that both curves are very steep. They are not perfectly vertical, as would be true for perfectly inelastic demand and supply, but they ARE very steep. The steepness of these curves is designed to visually indicate that relatively small changes in quantity result from relatively large changes in price.

However, having highlighted the steepness of these curves, please note that slope and elasticity are two different concepts. In particular, it is NOT possible to determine the elasticity of a demand curve JUST by looking at its slope. A steeply sloped demand curve, like the one displayed here, actually could be relatively elastic. The key to indicating relatively inelastic demand is that this is the lower segment of the curve, the part near the horizontal quantity axis.

An example or two should help illustrate relatively inelastic demand and relatively inelastic supply.

### Demand

The key for relatively inelastic demand is that a good has very few substitutes-in-consumption. Buyers can be enticed to switch between this good and other goods, but doing so requires big price changes. Buyers could switch to a substitute good if the price gets a little too high, but they would rather not. The fabricated example offered for purposes of illustration is Merciless Monolithic Media Masters (4M) Cable Television. This is a distinctive product with few close substitutes-in-consumption. The closest substitutes are broadcast television (the networks), satellite systems, movie theaters, video tapes, DVDs, broadcast radio, live theater, other live entertainment, newspapers, magazines, and books. None provide quite the same satisfaction as cable television. They are substitutes, but not great substitutes.

As such, the demand for 4M Cable Television is relatively inelastic. 4M Cable Television can change prices and buyers continue to buy ABOUT the same quantity. If the price increases too much, then 4M Cable Television buyers will install satellite systems, read books, or rent feature films on DVD. If the price falls too much, non-4M customers will decide to buy the 4M Cable Television services. Because these alternatives are NOT close substitutes, it takes relatively large price changes to induce buyers to switch.

### Supply

The key for relatively inelastic supply is that a good has very few substitutes-in-production. In particular, it is very difficult to switch resources between the production of this good and others using the same resources. In many cases the good uses highly specialized or rare resources that are difficult (and thus costly) to acquire. One hypothetical example of relatively inelastic supply is Mona Mallard Duct Tape.

While it might seem as though duct tape (that shiny gray tape that is used for every conceivable purpose EXCEPT sealing ventilation ducts) is easily produced by switching resources from the production of cellophane tape, electrical tape, or adhesive tape, Mona Mallard Duct Tape has a special "something" that generates a relatively elastic supply. That special something is quagliminium, a rare adhesive substance found only in the natural vegetation growing in the isolated country of Northwest Queoldiolia. Therefore, to increase the quantity supplied of duct tape, Mona Mallard must acquire greater amounts of quagliminium, which is always an expensive proposition.

As such, the supply of Mona Mallard Duct Tape is relatively inelastic. The price Mona Mallard receives for its duct tape must rise significantly before there is much of an increase in the quantity supplied.

 <= RELATIVELY ELASTIC RENT SEEKING =>

Recommended Citation:

RELATIVELY INELASTIC, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: August 12, 2024].

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