Elasticity

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DEFINITION of 'Elasticity'

A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes.

Calculated as:

Elasticity

BREAKING DOWN 'Elasticity'

Elasticity is used to assess the change in consumer demand as a result of a change in the good's price. When the value is greater than 1, this suggests that the demand for the good/service is affected by the price, whereas a value that is less than 1 suggest that the demand is insensitive to price.

Businesses often strive to sell/market products or services that are or seem inelastic in demand because doing so can mean that few customers will be lost as a result of price increases.

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