For needs, the basic response is an inelastic change exists in demand with a price change. Above, fuel for your car was used as one example. But, let\u2019s use food as another example. In this case, we are not going to use one particular item because often people can substitute one item with a less expensive item if the price increases. Let’s use the whole grocery cart for the week of household food.\u00a0\u00a0<\/span><\/p>\n

Suppose that the grocery cart of food suddenly increases from $165 to $175 for the same group of items. In general will the shopper change their habit? Odds are that they will not. They may look for alternatives to lower the price but let\u2019s just assume that the cart contains pure basic foods such as the lowest cost loaves of bread, no pre-made items and no luxury foods such as sodas or alcohol. The meats come from large quantities of the lowest costs meats on sale each week. Naturally the consumer has no choice but to pay the price of $175. Here the price can go up several times but the demand will change very little in proportion. The demand line (volume or quantity of food purchased) changes very little as the price increases or decreases. This illustrates inelastic demand as the price changes. That is for needs, as the price changes, the overall demand does not. This holds true for all the needs related to goods and services. If you broke your arm, it doesn\u2019t matter whether the doctor charges $400 or $800, you are going to pay the price to get the arm fixed.\u00a0<\/span><\/p>\n

Now think about inelastic supply. In this situation, the basic principle is that the producer will not change his production with any dramatic change in price. Let\u2019s review a couple of examples:\u00a0<\/span><\/p>\n

Cruise Ships<\/strong> \u2013 in this industry there is a set amount of supply. As a particular week gets closer on the calendar, the price per cabin can decrease dramatically but the number of cabins on the cruise liner doesn\u2019t change at all.\u00a0<\/span><\/p>\n

Nuclear Energy <\/strong>\u2013 this is another interesting example. To make nuclear power, the reactor runs at full speed, there is no variable control knob that basically allows the plant to produce only \u00bd the energy or 90%. In effect, the plant was either \u2018ON\u2019 or \u2018OFF\u2019; no in-between. Therefore, the producer is unaffected by the change in price. To produce more energy if the price increases warranted such a step would require a significant investment of time and money. In addition, the producer would need to recruit qualified technicians and operators which is difficult to do.<\/span><\/p>\n

Education <\/strong>\u2013 how many new colleges have you seen in the last five years? There haven’t been any new universities opening up over the last 10 years and we all know tuition has increased several percent per year over the last 20 years. This is a good example of price increasing with no change in supply.<\/span><\/p>\n

Cigarettes <\/strong>\u2013 do you believe the consumption of this item changes with price? Highly unlikely because those members of our society that smoke will not consume more or less no matter what happens with the price of a carton of cigarettes. Do you think for one minute that if the price of a pack of smokes were cut in half that there will be a sudden increase in the number of smokers thus requiring greater production to meet that demand? Now, there may be a run on the cigarettes if there is a sudden decrease in price but that is in response to the belief that the price will go back to normal in the near future.\u00a0<\/span><\/p>\n

Do you notice any common traits associated with the above? Well, one characteristic is the difficulty of increasing or decreasing the supply related to a price change. Many of the supply issues relate to the high investment barrier to add an additional line of production or build another ship or airplane.\u00a0\u00a0<\/span><\/p>\n