What Is Elasticity?

Elastic is a term used in economics to describe a change in the behavior of buyers and sellers in response to a change in price for a good or service. How the demand for the good or service reacts in response to a change in price determines the demand elasticity or inelasticity for that good. An inelastic product is one that consumers continue to purchase even after a change in price. The elasticity of a good or service can vary according to the number of close substitutes available, its relative cost, and the amount of time that has elapsed since the price change occurred.

Key Takeaways

  • Companies that operate in highly competitive industries offer products and services that are elastic, as the companies tend to be price-takers.
  • When the price of a good or service has reached the point of elasticity, sellers and buyers quickly adjust their demand for that good or service.
  • Elasticity is an important economic measure, particularly for sellers of goods or services, because it indicates how much of a good or service buyers consume when the price changes.
  • Products or services that are elastic are either unnecessary or can be easily replaced with a substitute.
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What Is Elasticity?

Understanding Elasticity

Companies that operate in fiercely competitive industries provide goods or services that are elastic because these companies tend to be price-takers or those who must accept the prevailing prices. When the price of a good or service reaches the point of elasticity, sellers and buyers quickly adjust their demand for that good or service. 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 the price changes.

The Significance of Elasticity

Elasticity is an important economic measure, particularly for the sellers of goods or services, because it indicates how much of a good or service buyers consume when the price changes. When a product is elastic, a change in price quickly results in a change in the quantity demanded. When a good is inelastic, there is little change in the quantity of demand even with the change of the good's price. 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.

Elasticity also communicates important information to consumers. If the market price of elastic good decreases, firms are likely to reduce the number of goods or services they are willing to supply. If the market price goes up, firms are likely to increase the number of goods they are willing to sell. This is important for consumers who need a product and are concerned with potential scarcity.

Real World Examples of Elastic Goods

Typically, goods that are elastic are either unnecessary goods or services or those for which competitors offer readily available substitute goods and services. The airline industry is elastic because it is a competitive industry. 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 a decrease in the demand for its services.