Elasticity vs.

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. Elasticity measures how demand
shifts when other economic factors change. When fluctuating demand is
unrelated to an economic factor, it is called inelasticity.

Price is the most common economic factor used when determining elasticity or
inelasticity. Other factors include income level and substitute availability.

Elastic demand means there is a substantial change in quantity demanded when

another economic factor changes (typically the price of the good or service),
whereas inelastic demand means that there is only a slight (or no change) in
quantity demanded of the good or service when another economic factor is
changed.

The elasticity of demand is an important economic concept. This article will

explore more about the concepts of elasticity and demand, and the difference
between demand that is elastic and demand that is considered inelastic.

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.


Elasticity of Demand

The elasticity of demand, or demand elasticity, refers to how sensitive demand

for a good is compared to changes in other economic factors, such as price or
income. It is commonly referred to as price elasticity of demand because the
price of a good or service is the most common economic factor used to measure
it.

The elasticity of demand helps companies predict changes in demand based on

a number of different factors, including changes in price and the market entry of
competitive goods.
An elastic good is defined as one where a change in price leads to a significant
shift in demand. In general, the more substitutes there are for an item, the
more elastic demand for it will be.

The elasticity of demand for a given good or service is calculated by dividing the
percentage change in quantity demanded by the percentage change in price. If
the elasticity quotient is greater than or equal to one, the demand is considered
to be elastic.

Demand is sometimes plotted on a graph: A demand curve shows how the

quantity demanded responds to price changes. The flatter the curve, the more
elastic demand is.

Price Elasticity of Demand

The elasticity of demand is commonly referred to as price elasticity of demand

because the price of a good or service is the most common economic factor used
to measure it.

For example, a change in the price of a luxury car can cause a change in the
quantity demanded. If a luxury car producer has a surplus of cars, they may
reduce their price in an attempt to increase demand. The extent of the price
change will determine whether or not the demand for the good changes and if so,
by how much.

Price elasticity of demand is calculated by taking the proportional change of the

amount purchased (in response to a small change in price), divided by the
proportional change of price.

Income Elasticity of Demand

The income elasticity of demand is also known as the income effect. The income
level of a given population can influence the demand elasticity of goods and
services.

For example, suppose that an economic event leads to many workers being laid
off. During this time period, people may decide to save their money rather than
upgrading their smartphones or buying designer purses. This would lead to
luxury items becoming more elastic. In other words, a slight change in income
level would lead to a significant change in the consumption of luxury goods.

Examples of Elastic Products

Common examples of elastic products are consumer discretionaries, such as a

brand of cereal. Certain food products are not a necessity. For instance, it’s
reasonable to argue that people would stop buying a particular brand of cereal if
its price shot up dramatically, particularly if other comparable products didn’t
follow suit and kept their prices the same.

Conversely, if this same brand of cereals experienced a steep price cut, we’d
expect more people to buy it, assuming its level of quality is similar to peers and
we aren't in a deep recession.

Another example of an elastic product is a Porsche sports car. Because a

Porsche is typically such a large portion of someone's income, if the price of a
Porsche increases in price, demand will likely be elastic. There are also
alternatives, such as Jaguar or Aston Martin.

Similarly, if the price of a Kit-Kat chocolate bar increases, people will buy a
different type of candy bar.

Inelasticity of Demand

An inelastic product, on the other hand, is defined as one where a change in

price does not significantly impact demand for that product.

Should demand for a good or service be static when its price or other factor
changes, it is said to be inelastic. In other words, when the price changes or
consumer's incomes change, they will not change their buying habits.

Inelastic products are necessities and, usually, do not have substitutes they can
easily be replaced with.

For businesses, there are many advantages to price inelasticity. For example,
they have greater flexibility with prices because demand remains basically the
same, even if prices increase or decrease. If the business raises its prices up or
down, consumers' buying habits will remain mostly unchanged. This can impact
demand and total revenue for a business in a couple of different ways.
Examples of Inelastic Products

The most common goods with inelastic demand are utilities, prescription drugs,
and tobacco products. In general, necessities and medical treatments tend to be
inelastic, while luxury goods tend to be the most elastic.

Another typical example is salt. The human body requires a specific amount of
salt per pound of body weight. Too much or too little salt could cause illness or
even death, so the demand for it changes very little when price changes—salt
has an elasticity quotient that is close to zero and a steep slope on a graph.

While there are no perfectly inelastic goods, there are some goods that come
pretty close. For example, people need gas to drive their cars. Even if gas prices
get higher, people may not be able to stop commuting to work, taking their kids to
school, and driving to the store. Thus, people will still purchase gas even at a
higher price.

Elasticity FAQs

What Is the Best Definition of Elasticity?

In general, elasticity is a measure of a variable's sensitivity to a change in a

different variable. Most often, elasticity refers to the change in demand when the
price for a good or service changes.

How Is Elasticity Measured?

Elasticity is measured by the ratio of two percentages. For example, consider the
price elasticity of demand. The price elasticity of demand is measured by
calculating the ratio of the change in the quantity demanded to the change in the
price. In other words, price elasticity is the ratio of a relative change in quantity
demanded to a relative change in price.

What Does a Price Elasticity of 1.5 Mean?

If the price elasticity is equal to 1.5, it means that the quantity demanded for a
product has increased 15% in response to a 10% reduction in price (15% / 10%
= 1.5).

What Is an Example of Elasticity?

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.—consumers do not have to pay one price for housing. 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.

Numerical Example
If price of a product decreases from Rs.70 to Rs.60 and due to it quantity
demanded increases from 2800 units to 3000units, what will be the price
elasticity of demand. Explain your answer.
The formula for calculating PED will be:
% Change in Quantity Demanded / % Change in Price
(Q2-Q1) / Q1 * 100
PED = --------------------------------- = 0.5
(P2-P1) / P1 * 100
Therefore, the elasticity of demand between these two points is 0.5, an amount
smaller than one, showing that the demand is inelastic in this interval. Price
elasticities of demand are always negative since price and quantity demanded
always move in opposite directions (on the demand curve). By convention, we
always talk about elasticities as positive numbers. So mathematically, we take
the absolute value of the result. We will ignore this detail from now on, while
remembering to interpret elasticities as positive numbers.