The Basics
- Simple definition: A measure of how much quantity demanded responds to a change in price.
- Core idea: How sensitive are buyers to price changes?
- Think of it as: The “stretchiness” of demand when prices move.
What It Actually Means
Price elasticity = (% change in quantity demanded) ÷ (% change in price). If elasticity > 1, demand is elastic (sensitive to price). If < 1, demand is inelastic (insensitive). Necessities (medicine, basic food) tend to be inelastic; luxuries (restaurant meals, air travel) tend to be elastic. Elasticity determines how price changes affect total revenue: for elastic goods, price cuts raise revenue; for inelastic goods, price hikes raise revenue.
Example
In Pakistan, wheat is a staple with inelastic demand. If the price rises 10%, the quantity demanded falls only 2% (elasticity 0.2). People still need to eat. But if cinema tickets rise 10%, attendance might fall 15% (elasticity 1.5) – people can skip movies.
Why It Matters (2026)
Businesses use elasticity for a pricing strategy. Governments use it for tax policy – taxing inelastic goods (cigarettes, fuel) raises revenue with less consumption reduction.
See also
Elasticity • Income Elasticity of Demand • Cross Elasticity of Demand • Price Elasticity of Supply • Total Revenue
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