Question

Think of three goods for which the demand is inelastic with respect to price. Do these goods ever go on sale? Does understanding the relationship between elasticity and total revenue help you understand why some goods go on sale and others don’t? Share your thoughts.

Answer 1

Demand for a good is said to be inelastic when percentage change in quantity demanded for that good is less than it's percentage change in price. That is, for an inelastic good, quantity demanded changes by a very little amount even if price changes by a large amount. Three goods that have inelastic demand are- Water, electricity, medicine.

Among the three above mentioned goods, water and electricity Never go on sale because companies that supply running water and elasticity, they know that people need these two for living. So, people will consume these two even if utility companies increases price, taking advantage of the inelastic demand. On the other hand, prescription medication is also needed regardless of it's price.

Understanding the relationship between elasticity and total revenue might help you understand why some goods go on sale when others don't. Inelastic demand means even if price increases by larger amount, quantity demanded falls by a very little amount, increasing total revenue from selling the good. Therefore, in case of inelastic demand, change in price and change in total revenue moves in the same direction. So,suppliers often take advantage of this and increase price of inelastic goods in order to increase revenue.

Therefore, we can conclude that, goods with inelastic demand never go on sale because it's demand never decreases.