Elastic or Inelastic: What Happens When Price Changes?
Elasticity measures how strongly quantity demanded responds to a price change.
Basic concept
Price elasticity compares percentage change in quantity demanded with percentage change in price.
Elastic demand
Quantity responds proportionally more strongly to price, so customers are relatively price sensitive.
Inelastic demand
Quantity changes proportionally less than price, so customers are relatively less sensitive.
Total revenue intuition
Under standard assumptions, a price decrease can increase total revenue with elastic demand, while a price increase can increase total revenue with inelastic demand.
What affects elasticity
Substitutes, necessity vs luxury characteristics, time horizon, budget share, and market definition can matter.
The takeaway
Elastic means customers react strongly to price. Inelastic means quantity is less responsive.
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FAQ
Does elastic mean demand is high?
No. It refers to responsiveness.
Do more substitutes generally increase elasticity?
Often yes.
Can elasticity affect pricing strategy?
Yes.