Demand Elasticity

Loading the player...

What is 'Demand Elasticity'

Demand elasticity, in economics, refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior. Elasticities greater than one are called "elastic," elasticities less than one are "inelastic," and elasticities equal to one are "unit elastic."

BREAKING DOWN 'Demand Elasticity'

Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. One example is the price elasticity of demand; this measures how the quantity demanded changes with price. This is important for setting prices so as to maximize profit.

When price elasticity of demand is elastic, the firm should lower prices, since it will result in a big uptick in demand, increasing your total revenue. When price elasticity of demand is inelastic, you should increase prices because there will be only a small decrease in demand, and again, total revenue will increase. When price elasticity of demand is unit elastic, changing the price will not change total revenue, since price and quantity will generally change in lock step with each other.

RELATED TERMS
  1. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
  2. Cross Elasticity Of Demand

    An economic concept that measures the responsiveness in the quantity ...
  3. Arc Elasticity

    The elasticity of one variable with respect to another between ...
  4. Income Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
  5. Elastic

    An economic term referring to the change in behavior that buyers ...
  6. Total Revenue Test

    A test that approximates the price elasticity of demand by comparing ...
Related Articles
  1. Fundamental Analysis

    How Demand Changes With a Variation in Price

    What is demand elasticity?
  2. Economics

    What's Demand Elasticity?

    Demand elasticity is the measure of how demand changes as other factors change. Demand elasticity is often referred to as price elasticity of demand because price is most often the factor used ...
  3. Economics

    Price Elasticity Of Demand

    Price elasticity of demand describes how changes in the cost of a product or service affect a company's revenue.
  4. Economics

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  5. Fundamental Analysis

    What Is Elasticity?

    Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. Learn the basics about it here.
  6. Personal Finance

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  7. Economics

    What Does Inferior Good Mean?

    The term “inferior good” does not describe a lack of quality, but rather, is an economic term used when discussing elasticity of demand for a good.
  8. Economics

    What Does Inelastic Mean?

    The supply and demand for an inelastic good or service is not drastically affected when its price changes.
  9. Economics

    Macroeconomics: Supply, Demand and Elasticity

    By Stephen Simpson DemandDemand is driven by utility – the pleasure or satisfaction that a consumer obtains from consuming a good or service. Total utility is a function of the quantities ...
  10. Economics

    What is a Normal Good?

    A normal good is any good or service that sees an increase in demand due to an increase in income.
RELATED FAQS
  1. Under what circumstances might price elasticity significantly change?

    Discover under what circumstances price elasticity of demand might change and why it is such an important economic concept ... Read Answer >>
  2. What are some examples of demand elasticity other than price elasticity of demand?

    Learn about income elasticity of demand and cross elasticity of demand and how to interpret these two measures of demand ... Read Answer >>
  3. How many years can structural unemployment last?

    Understand the two different types of price elasticities, and learn how each one affects the stock purchasing decision of ... Read Answer >>
  4. What types of consumer goods demonstrate the price elasticity of demand?

    Learn how the price elasticity of demand is more sensitive for some types of consumer goods than others, and see what factors ... Read Answer >>
  5. How does price elasticity change in relation to supply and demand?

    Learn about how variations in price elasticity affect the supply and demand curves and what factors cause differences in ... Read Answer >>
  6. If a particular good's price elasticity is high, does this mean the supplier should ...

    Learn the basics of price elasticity of supply and demand and how each influences a company's production of goods and pricing ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center