Elastic

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What does 'Elastic' mean

Elastic is an economic term meant to describe a change in the behavior of buyers and sellers in response to a price change for a good or service. How the demand for the good or service reacts in response to a change in price determines its elasticity or inelasticity. The elasticity of a good or service can vary according to the amount of close substitutes, its relative cost and the amount of time that has elapsed since the price change occurred.

BREAKING DOWN 'Elastic'

Companies that operate in very fierce and competitive industries provide goods or services that are very elastic because these companies tend to be price takers. When a good or service is elastic, it means sellers and buyers quickly adjust their demand for that good or service when the price changes. The opposite of elastic is inelastic. When a good or service is inelastic, sellers and buyers are not as likely to adjust their demand for a good or service when its price changes.

The Significance of Elasticity

Elasticity is an important economic trend to study, particularly for sellers of goods or services because it gives them an idea of how much of a good or service buyers consume when the price changes. When a good is elastic, a change in price quickly results in a change in the quantity demanded. When a good is inelastic, there is little change to the quantity demanded if the price of the good changes. The change that is observed for an elastic good is an increase in demand when the price decreases and a decrease in demand when the price increases.

For consumers, elasticity also communicates important information. If the market price of a good goes down for an elastic good, firms likely reduce the amount of good or service they are willing to supply. If the market price goes up, firms likely increase the amount of good they are willing to sell. This is important for consumers who need a good and are concerned with potential scarcity.

Examples

Generally, goods that are elastic are either unnecessary goods or services or goods or services with competitors offering readily available substitute goods and services. The airline industry is very elastic because there is a lot of competition. If one airline decides to increase the price of its fares, consumers can use another airline, and the airline that increased its fares will see demand for its services decrease.

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