Elasticity of demand.
In plain English
Demand is called elastic when the quantity response is larger than the price change, and inelastic when it is smaller. Necessities with few substitutes, such as insulin or gasoline in the short run, tend to be inelastic. Goods with close substitutes, or purchases that can be postponed, tend to be elastic. Elasticity also grows over longer time horizons, because people find alternatives given time. Sellers care because raising the price of an elastic good can lower total revenue even though each unit earns more.
01Why it matters
Elasticity explains why a gas price spike drains household budgets without cutting driving much, and why a small price rise on a substitutable product can send customers elsewhere.
02The math, step by step
A price rises from $10 to $11, a 10 percent increase, and units sold fall from 1,000 to 850, a 15 percent decrease. Elasticity is 15 divided by 10, or 1.5. Demand is elastic, and revenue falls from $10,000 to $9,350.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Elasticity is not desire. It measures responsiveness to price, which depends mostly on whether substitutes exist. People want food intensely, and food demand is inelastic. People may barely care about one brand of soda, and its demand is highly elastic.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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