Derived vs. Inelastic Demand in Business Markets

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  • 0:00 Different Kinds of Demand
  • 0:43 Inelastic Demand
  • 1:29 Examples of Inelastic Demand
  • 2:36 Derived Demand
  • 3:08 Types of Derived Demand
  • 4:13 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

The simple law of demand governs much of the business world, however, there are some exceptions. In this lesson, we take a look at two of them - the idea of derived demand and the idea of inelastic demand.

Different Kinds of Demand

If you've been in business for long, you've probably figured out the basic theories of demand: that as prices fall, the demand for a good will increase, while as prices rise, the demand for the same good will decrease. It sounds simple enough, but the fact is that this is not always the case. There are some goods and services that don't respond to changes in price. And then there are some that respond just as much to the demand for different goods.

In this lesson, we will look at these two exceptions to the demand law. For inelastic demand we'll see how prices don't really change the quantity demanded, while for derived demand we'll see how completely different goods can have an impact.

Inelastic Demand

Some goods are just necessary no matter the cost. These goods are affected by inelastic demand. For a good to have inelastic demand, price changes cannot affect the quantity demanded. Note that this doesn't just apply to price increases. A decrease in price also has to leave the quantity demanded untouched. As you can imagine, these are highly valued goods. And doing anything to mess with their supply, or even have the perception of having altered the supply, is a quick way to infuriate plenty of people. Therefore, politicians often work to keep the quantity supplied of various inelastic demand goods stable.

Examples of Inelastic Demand

With all that talk of politicians, you may have wondered where I was going. However, if you want to see a politician sweat, just talk about gas prices. Gasoline is, after all, perhaps the most inelastic demand good that many of us come in contact with every day. No matter how much gasoline prices rise, people still need to drive their cars to work, and our economy depends on the use of massive 18-wheelers. Simply put, gas prices don't suffer from a lack of demand, unless you consider a tiny percentage of joy-riders deciding not to drive because gas is too expensive.

That said, there are plenty of other examples of inelastic goods. If you are addicted to something like smoking then you will continue to purchase cigarettes, no matter how high the prices are. For smokers, tobacco is an inelastic good. Likewise, if you have a condition that requires you to take a prescription drug, that drug now has inelastic demand for you. Unless you go to the doctor to get a new prescription, no matter how much that drug costs, you will be purchasing it.

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