Definition of Elastic
Elastic is a term used in economics to describe the responsiveness of demand or supply to price changes. When a product or service is considered elastic, it means that a change in price has a significant impact on the quantity demanded or supplied. By contrast, when it is inelastic, a similar change in price would have a smaller impact on the quantity demanded or supplied.
Example
To illustrate elasticity, let’s look at the market for gasoline. Assume that the price of gasoline goes up by 20%, and as a result, the quantity demanded decreases by 10%. This would indicate that the demand for gasoline is relatively elastic. It means that consumers are very sensitive to the price and will reduce their consumption significantly if the price increases.
On the other hand, if the price of insulin (a necessary medication for people with diabetes) goes up by the same 20%, and the quantity demanded decreases by only 2%, this indicates that the demand for insulin is inelastic. People with diabetes need insulin to survive, and they are willing to pay a higher price for it even if the price goes up.
Why Elasticity Matters
Elasticity is an important concept in understanding how markets work. A product’s demand elasticity affects how much it can be priced before consumers switch to substitutes or stop buying it entirely. Goods or services that are elastic face stiff competition and, therefore, need to be priced competitively to maintain market share. In contrast, goods or services that are inelastic have more pricing power, as consumers are more willing to pay higher prices for them.
Understanding the elasticity of a good or service is essential for businesses and policymakers when setting prices or taxes. Being able to predict how consumers will respond to price changes can help companies make informed decisions and optimize profits.