Why elasticity of demand

Consider a rubber band, a leather strap, and a steel ring. If you pull on two sides of a rubber band or Mr. Fantastic , the force will cause it to stretch a lot. If you use the same amount of force to pull on the ends of a leather strap, it will stretch somewhat, but not as much as the rubber band.

Each of these materials the rubber band, the leather strap, and the steel ring displays a different amount of elasticity in response to being pulled, and all three fall somewhere on a continuum from very stretchy elastic to barely stretchy inelastic.

There are different kinds of economic elasticity—for example, price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross-price elasticity of demand—but the underlying property is always the same: how responsive or sensitive one thing is to a change in another thing. While the law of demand does tell us that more of a good will be bought at a lower price, it does not tell us how much the quantity demanded will increase because of the price change.

For example, if a store owner raises prices, she can expect that the quantity demanded will drop, but she might not know how sensitive customers will be to the change. How many people will buy her products despite the price increase and how many people will be driven away? If a small change in price creates a large change in the quantity demanded, then we would say that the demand is very elastic —that is, the demand is very sensitive to a change in price. If, on the other hand, a large change in price results in a very small change in demand in the quantity demanded, then we would say the demand is inelastic.

As we will see later, elastic and inelastic are relative concepts. Consider the example of cigarette taxes and smoking rates—a classic example of inelastic demand. Cigarettes are taxed at both the state and federal level. As you might expect, the greater the amount of the tax increase, the fewer cigarettes are bought and consumed.

In the most basic sense, elasticity is a measure of a variable's sensitivity to a change in another variable. Most commonly, elasticity refers to an economic gauge that measures the change in the quantity demanded for a good or service in relation to price movements of that good or service. For example, when demand is elastic, its price has a huge impact on its demand. Housing is an example of a good with elastic demand.

Because there are so many options for housing—house, apartment, condo, roommates, live with family, etc. If one type of housing cost becomes really expensive, or housing in a particular region becomes really expensive, many people will opt for a different type of housing rather than paying the higher price.

In this way, the variable of housing is very sensitive to changes in price. With elastic demand, demand changes more than the other variable most often price , whereas with inelastic demand, demand does not change even when another economic variable changes. Products and services for which consumers have many options most often have elastic demand, while products and services for which consumers have few alternatives are most often inelastic.

Economists use price elasticity of demand to measure demand sensitivity as a result of price changes for a given product. This measurement can be useful in forecasting consumer behavior and economic events, such as a recession. Harvard Business Review. Behavioral Economics. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.

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Elasticity vs. Inelasticity of Demand. Elasticity of Demand. Special Considerations. Elasticity FAQs. The Bottom Line. Inelasticity of Demand: An Overview Inelasticity and elasticity of demand refer to the degree to which demand responds to a change in another economic factor, such as price, income level, or substitute availability.

Key Takeaways Elasticity of demand refers to the degree in the change in demand when there is a change in another economic factor, such as price or income. If demand for a good or service remains unchanged even when the price changes, demand is said to be inelastic.

Examples of elastic goods include luxury items and certain food and beverages. Inelastic goods, meanwhile, consist of items such as tobacco and prescription drugs. The elasticity of demand is calculated by dividing the percentage change in the quantity demanded by the percentage change in the other economic variable.

Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. Demand response to price fluctuations is different for a one-day sale than for a price change that lasts for a season or a year.

Clarity in time sensitivity is vital to understanding the price elasticity of demand and for comparing it across different products. Consumers may accept a seasonal price fluctuation rather than change their habits. As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price changes, the product is termed elastic.

The elasticity of apples therefore is: 0. Harvard Business Review. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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Popular Courses. Part Of. Introduction to Microeconomics. Microeconomics vs. Supply and Demand Basics. Microeconomics Concepts. Table of Contents Expand. What Is Price Elasticity of Demand? Understanding Price Elasticity of Demand. Example of Price Elasticity of Demand. Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.