Definition: Perfectly inelastic demand or supply is an economic condition in which a change in the price of a product or a service has no impact on the quantity demanded or supplied because the elasticity of demand or supply is equal to zero. This idea is largely an economic theory because it rarely happens in the real world.
What Does Perfectly Inelastic Mean?
What is the definition of perfectly inelastic? In a perfectly inelastic demand or supply, a change in price leaves the quantity demanded or supplied unaffected. In this case, the quantity demanded or supplied is unresponsive to price changes. This type of demand occurs when consumers have no substitute goods to meet their needs; a perfectly inelastic supply occurs when supplies have no substitute goods to produce.
Here is what both inelastic demand and supply curves look like:
Let’s look at an example.
Example
A manufacturing firm operates at full capacity, thus being unable to increase supply. The management decides to hire some extra workers to help with the high level of production, but, as the company operates at full capacity, it has also exhausted its short-term capital. Furthermore, the company is running out or raw materials and, the lack of short-term capital makes it impossible to increase supply at the moment.
Another problem that the company currently faces is the labor constraints. Although the production does not require highly skilled labor, the management has to hire extra workers. These workers will work 5 hours per day with the minimum wage. Yet, due to the limited factors of production, and the lack of short-term capital, the company cannot increase supply at the moment. Even if it hires extra workers, it will take some time until the company is able to meet a higher level of production. It will probably need a bigger factory, more workers, and more long-term capital.
Given the above situation, the supply of this manufacturing company is perfectly inelastic. The company cannot produce any substitute goods and a change in price will leave the quantity supplied unaffected.
Summary Definition
Define Perfectly Inelastic: Perfectly inelastic is used to describe a market in which a change in price does not change consumers’ purchasing decisions or actions.
