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What is 'Elastic'?

Elastic is a term used in economics 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 the demand elasticity or inelasticity for that good. The elasticity of a good or service can vary according to the number 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 fiercely competitive industries provide goods or services that are elastic because these companies tend to be price-takers. When a good or service is elastic, 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 the price changes.

The Significance of Elasticity

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. 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 in 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.

Elasticity also communicates important information to consumers. If the market price of a good goes down for an elastic good, firms are likely to reduce the amount of good or service they are willing to supply. If the market price goes up, firms are likely to 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 of Elastic Goods

Typically, goods that are elastic are either unnecessary goods or services or goods or services 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.

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