Demand Elasticity

Published Apr 13, 2023

Definition of Demand Elasticity

Demand elasticity refers to the sensitivity of the quantity demanded of a good or service to changes in its price, income, or other factors that affect consumer behavior. A product is considered to be elastic if a small change in price leads to a large change in quantity demanded and inelastic if a change in price leads to a small change in quantity demanded.

Example

To illustrate this, suppose the price of coffee increases by 10%. If the quantity demanded of coffee decreases by more than 10%, then the demand for coffee is considered elastic. This means that people are very sensitive to changes in the price of coffee, and a small change in price causes a larger change in the quantity demanded.

On the other hand, if the quantity demanded of coffee decreases by less than 10%, then the demand for coffee is considered inelastic. This means that people are not very sensitive to changes in the price of coffee, and a small change in price causes a smaller change in the quantity demanded.

In general, the demand for coffee is considered to be somewhat elastic, meaning that people are relatively sensitive to changes in its price. For example, if a coffee shop raises its prices, some customers may decide to buy coffee from a competitor or switch to a different beverage, leading to a reduction in the quantity demanded of coffee. Conversely, if a coffee shop lowers its prices, some customers may be more likely to buy coffee, leading to an increase in the quantity demanded of coffee.

Why Demand Elasticity Matters

Understanding demand elasticity is crucial for firms in determining the prices of their products because it helps them to estimate the changes in revenue that will result from a change in price. If a product is elastic, firms need to be careful not to increase prices too much, as that could lead to a significant reduction in sales. On the other hand, for inelastic products, firms can increase prices with little impact on the demand. Thus, by analyzing the demand elasticity, firms can develop effective pricing and marketing strategies that can increase their revenues and profits.