# Elasticity

## What is 'Elasticity'

Elasticity is a measure of a variable's sensitivity to a change in another variable.

In business and economics, elasticity refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service's price.

Next Up

## BREAKING DOWN 'Elasticity'

When the value of elasticity is greater than 1, it suggests that the demand for the good or service is affected by the price, A value that is less than 1 suggests that the demand is insensitive to price.

Elasticity is an economic concept that's used to measure the change in the aggregate quantity demanded for a good or service in relation to price movements of that good or service. A product is considered to be elastic if the quantity demand of the product changes drastically when its price increases or decreases. Conversely, a product is considered to be inelastic if the quantity demand of the product changes very little when its price fluctuates.

For example, insulin is a product that is highly inelastic. For diabetics who need insulin, the demand is so great that price increases have very little effect on the quantity demanded. Price decreases also do not affect the quantity demanded; most of those who need insulin aren't holding out for a lower price and are already making purchases.

On the other side of the equation are highly elastic products. Bouncy balls, for example, are highly elastic in that they aren't a necessary good, and consumers will only decide to make a purchase if the price is low. Therefore, if the price of bouncy balls increases, the quantity demanded will greatly decrease, and if the price decreases, the quantity demanded will increase.

## The Importance of Price Elasticity in Business

Understanding whether or not a business's product or service is elastic is integral to the success of the company. Companies with high elasticity ultimately compete with other businesses on price and are required to have a high volume of sales transactions to remain solvent. Firms that are inelastic, on the other hand, have products and services that are must-haves and enjoy the luxury of setting higher prices.

Beyond prices, the elasticity of a good or service directly affects the customer retention rates of a company. Businesses often strive to sell goods or services that have inelastic demand; doing so means that customers will remain loyal and continue to purchase the good or service even in the face of a price increase.

RELATED TERMS
1. ### Price Elasticity Of Demand

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

In economics, the demand elasticity refers to how sensitive the ...
3. ### Income Elasticity Of Demand

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

An economic concept that measures the responsiveness 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. Personal Finance

### How Demand Changes With a Variation in Price

What is demand elasticity?
2. Markets

### 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. Markets

### 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. Markets

### Calculating Cross Elasticity of Demand

Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
5. Markets

### Calculating Income Elasticity of Demand

Income elasticity of demand is a measure of how consumer demand changes when income changes.
6. Markets

### 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. Markets

### 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.
8. Markets

### What Does Inelastic Mean?

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

### Explaining Quantity Demanded

Quantity demanded describes the total amount of goods or services that consumers demand at any given point in time.
10. Markets

### 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.
RELATED FAQS
1. ### 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 >>
2. ### Which factors are more important in determining the demand elasticity of a good or ...

Learn about demand elasticity of goods and services and the main factors that influence the elasticity of demand. Read Answer >>
3. ### 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 >>
4. ### 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 >>
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. ### What is the difference between price inelasticity and inelasticity of demand?

Learn how supply, demand and pricing are interrelated by studying the concepts used by economists to measure pricing fluctuations. Read Answer >>
Hot Definitions
1. ### GBP

The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
2. ### Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
3. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...
4. ### Sell-Off

The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
5. ### Brazil, Russia, India And China - BRIC

An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
6. ### Brexit

The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...