The offer is perfectly inelastic when, regardless of the price that a good or service may take, it is only possible to offer a certain quantity of it.
Since the quantity of the good or services offered remains constant in the face of any price variation, its elasticity becomes practically zero. Goods with this type of elasticity have a special characteristic, given that bidders can only offer the same quantity of the good at any price level. Therefore, it is stated that the offers of these goods are inevitably insensitive to price changes.
Perfectly inelastic supply curve graph
The following graph presents the perfectly inelastic supply curve, which is a horizontal straight line.
Look at the graph above, the offer is displayed as a vertical line at its price. This shape of the curve reveals that the quantity supplied remains constant even though the price takes progressive increases. Thus, bidders can only offer the same amount regardless of the price that can be paid.
Goods with perfectly inelastic supply
In economic reality, there are goods that meet this characteristic. Thus, among these assets, the following list may be cited:
- Water from a spring
- Portion of land in front of a beach
- Artistic work
The reality is that, before this type of property, their owners are not in a position to increase the offer, under any circumstances of price.
Perfectly inelastic elasticity formula
To determine if we are dealing with a good with a perfectly inelastic offer, the following formula is used:
By this formula, we can determine the value of elasticity. If this value is equal to zero, then we will be facing a good with a perfectly inelastic supply.
Example of a perfectly inelastic elasticity calculation
A painter performs 2 artistic works a month, his works have acquired value in the market, past their price of 4,000 to 7,000 euros each painting. Check the elasticity.
Let us then proceed to determine in this case what the elasticity coefficient is. For this we are going to use the formula previously stated. This is the following:
Step number 1: This step you cooked in we determine the top of the formula. That is, the percentage variation in the quantities.
- We determine the absolute change in quantities, which is obtained by subtracting the final demand from the initial demand. This is (2 – 2 = 0). Now dividing this value by the initial demand. Thus we have the following: 0/2 = 0 which, taken to a percentage value, is equal (0 x 100 = 0%)
This 0% then represents the percentage variation of the quantity supplied. That is, we have determined the top of the formula.
Step number 2: This step consists of determining the bottom of the formula. That is, the percentage change in price.
- We determine the absolute change in the price, which is obtained by subtracting the final price from the initial price, that is (7,000 – 4,000 = 3,000). Now dividing this value by the initial price, we have the following (3,000 / 4,000 = 0.75) which, taken to a percentage value, is equal to (0.75 x 100 = 75%).
This 75% then represents the percentage variation in the price. That is, we have determined the bottom of the formula.
Step number 3: In this final step we proceed to substitute the values determined in two steps one and two, in the elasticity formula. Let’s see:
So the supply for this product is perfectly inelastic, since its elasticity coefficient is zero. As can be seen, a change in price has not been a reason for a variation in the quantity supplied.