Elasticity: What It Means in Economics, Formula, and Examples

What is elasticity?

Elasticity measures how responsive one variable is to changes in another. In economics, it most commonly describes how quantity demanded or supplied responds to changes in price, income, or the price of related goods. A high elasticity means quantity changes a lot when the influencing variable changes; low elasticity (inelasticity) means quantity changes little.

Key takeaways

• Elasticity quantifies responsiveness between variables (commonly price and quantity).
• Price elasticity of demand is critical for sellers because it shows how demand reacts to price changes.
• Goods are elastic if demand changes substantially with price; inelastic if demand remains relatively stable.
• Factors that influence elasticity include the availability of substitutes, whether a good is a necessity, its relative cost, and time since the price change.

How elasticity is measured (formula)

Price elasticity of demand (PED) is calculated as:

PED = (% change in quantity demanded) / (% change in price)

Common interpretations:
* |PED| > 1 → elastic (quantity responds proportionally more than price)
* |PED| < 1 → inelastic (quantity responds less than price)
* |PED| = 1 → unit elastic

Example: If price rises 10% and quantity demanded falls 20%, PED = -20% / 10% = -2 (elastic). Analysts often use the absolute value when classifying elasticity.

Types of elasticity

• Price elasticity of demand: response of demand to price changes.
• Income elasticity of demand: response of demand to changes in consumer income (normal vs. inferior goods).
• Cross-price elasticity: response of demand for one good to price changes in another (substitutes vs. complements).
• Elasticity of supply: responsiveness of quantity supplied to price changes.

Factors that determine elasticity

• Availability of close substitutes: more substitutes → more elastic demand.
• Necessity vs. luxury: necessities tend to be inelastic; luxuries more elastic.
• Share of budget: higher-cost items tend to have more elastic demand.
• Time horizon: demand/supply usually become more elastic over longer time periods as consumers and producers adjust.

Perfectly elastic and perfectly inelastic

• Perfectly elastic: an infinitesimal price change causes infinite change in quantity demanded (horizontal demand curve). Rare in real markets but a useful theoretical extreme.
• Perfectly inelastic: quantity demanded does not change regardless of price (vertical curve). Examples are rare; some essential medical supplies can approach this in the short term.

Real-world examples

• Elastic example: Airline fares — many carriers and substitute routes make consumers sensitive to price changes, so demand is relatively elastic.
• Inelastic example: Gasoline — in the short run, many consumers need fuel regardless of price, so demand is relatively inelastic.
• Other inelastic goods often include basic food staples, certain utilities, and urgent medical care.

Implications for businesses and policy

• Firms with elastic demand should be cautious raising prices because large demand drops may reduce revenue.
• Firms selling inelastic goods have more pricing power and can raise prices with smaller effects on quantity sold.
• Policymakers use elasticity to predict tax incidence, the effect of price controls, and how consumers will respond to subsidies or taxes.

Bottom line

Elasticity is a fundamental concept that helps explain how quantity demanded or supplied responds to changes in price, income, or related goods. Understanding whether a good is elastic or inelastic guides pricing decisions, revenue forecasts, and policy analysis.