The price inelasticity of demand is an economic concept that measures the low responsiveness of the quantity demanded of a good or service to a change in its price. It is a specific type of the broader Price Elasticity of Demand. The concept was formalized by economist Alfred Marshall (1842-1924), who first used the term "elasticity of demand" in print in 1885. Marshall elaborated on this idea in his seminal work, Principles of Economics, first published in 1890. The concept solved the problem of quantifying the degree to which demand changes, which the simple "law of demand" did not explain.
The mechanism works by calculating the price elasticity of demand (PED) coefficient, which is the ratio of the percentage change in quantity demanded to the percentage change in price. A product is considered price inelastic when the absolute value of this coefficient is less than 1. This means that a given percentage increase in price results in a proportionally smaller percentage decrease in the quantity demanded. For example, if the price rises by 10% and demand falls by only 3%, the demand is inelastic. This situation typically applies to necessity goods, such as medical insulin or electricity, or products with a lack of close substitutes.
The concept connects to other measures of consumer sensitivity, including income elasticities and cross-price elasticities of demand. It is also related to elastic demand (coefficient greater than 1) and unit elastic demand (coefficient equal to 1). The core concept has remained consistent, but what Marshall called "elasticity of demand" is now precisely termed price elasticity of demand to differentiate it from these other elasticities. Understanding inelasticity is crucial for a firm's total revenue and for government decisions on tax policy.