What Does Inelastic Mean?

Inelastic means that there are not many factors that can influence an outcome. For example, inelastic demand means that goods and services will not be impacted directly by a citizen's salary changes. The purchase of items like eggs and bread, are income inelastic.

That principle can be applied to many economical scenarios, including state and local taxes. For example, local taxes that are applied to the sale of items, or local sales taxes, can sometimes effect the sale of that good. If produce suddenly incurs local taxes, consumers may not purchase as much produce as they did previous to the local taxes on produce. However, items like produce are likely to be elastic as they are considered a necessary part of the human diet.

If however, local taxes were suddenly imposed on entertainment venue, consumers may forgo their night out. If a family generally enjoys a movie night once a week, they have probably allowed for that entertainment in their budget. If local taxes were then applied to each movie ticket, that family's budget may not allow for that change in price. In addition, if any family member began to experience a decrease in salary, they may no longer spend the money, once local taxes have been applied to their entertainment. Inelastic items tend to be those that are necessary for human survival, such as basic food and shelter.

Although basic shelter is inelastic, more expensive homes tend to be elastic and sales of those homes are based on the overall financial health of the nation. The recent financial crisis spotlighted the influence of the economy over the sale of homes. Before the economy crashed, even basic shelter incurred larger sales prices as homes became very valuable. However, more people are currently renting, or have moved to cheaper homes. Basic shelter is inelastic but more expensive shelter is very elastic.

The sale of inelastic items is not as based on supply and demand as elastic items are. No matter how many shelters there are, homes will always be inelastic. Yet, more expensive shelter is very elastic and dependent on supply and demand, in addition to the state of the economy. Basic shelter is more abundant due to the higher demand of such shelter which makes those homes inelastic. There will always be a need for inexpensive housing. Expensive homes are less abundant because their is not as high a demand for such homes. The demand for expensive housing changes in direct proportion to the state of the economy and is therefore very elastic.

NEXT: Understanding the Current Rates of Payroll Tax