Inelastic Demand

A condition in which quantity demanded changes proportionally less than a given price change, indicating consumers are relatively insensitive to price.

Source: Varian 2014

Demand is inelastic where a good has few substitutes and its purchase cannot easily be delayed, so buyers keep buying much the same amount even when the price rises. Life-sustaining treatment illustrates this, since a patient needing insulin or emergency surgery has little scope to cut back or shop elsewhere when the price changes. The absence of an alternative, and the urgency of the need, are what make demand insensitive to price. Ringel and colleagues (2002) review low price responsiveness in health care.

Source: Ringel et al. 2002

Demand tends to be inelastic when the good is a necessity with few substitutes, so buyers cannot readily do without it or switch away; when it takes a small share of the budget, so a price change matters little; and when buyers have little time to adjust. Habitual or urgent purchases are also inelastic. Each of these limits the buyer's ability or inclination to change quantity in response to price, producing an elasticity less than one.

Source: Varian 2014

When demand is inelastic, a price rise reduces quantity proportionally less than the price increases, so total revenue rises, while a price cut lowers revenue. Revenue therefore moves in the same direction as price under inelastic demand. This is why sellers of goods with inelastic demand can raise revenue by increasing price, and it underlies the effectiveness of taxes on inelastic goods, which raise revenue without greatly reducing the quantity bought.

Source: Varian 2014

Much health care demand is inelastic because care is often a necessity with few substitutes, especially when illness is serious, so patients continue to seek it even as its price rises. Insurance further weakens the response to price by shielding patients from the full cost at the point of use, and limited information leaves patients reliant on providers. These features make the quantity of care demanded relatively insensitive to price, though some discretionary care is more elastic.

Source: Varian 2014

Inelastic demand affects health policy because patients respond weakly to price, so co-payments and price signals have limited power to reduce use of necessary care, and may deter needed as well as unnecessary care. It also means providers or manufacturers with market power over goods in inelastic demand can raise prices with little loss of sales, strengthening the case for price regulation. Recognising where demand is inelastic helps predict the effect of pricing measures on the use of care.

Source: Varian 2014