Title: Elasticity in Economics — What It Is, Why It Matters, and Practical Steps for Businesses
Key takeaways
– Elasticity measures how responsive one variable (usually quantity demanded or supplied) is to changes in another variable (usually price or income).
– Price elasticity of demand (PED) is the most-used elasticity: PED = (% change in quantity demanded) / (% change in price).
– Elastic goods (|PED| > 1) see large quantity changes when price changes; inelastic goods (|PED| 1 → elastic (quantity responds proportionally more than price)
– |PED| = 1 → unit elastic
– |PED| 0 → normal good (demand rises with income)
– YED 1 → luxury (demand rises proportionally more than income)
3. Cross-price elasticity of demand (XED)
– Formula: XED = (%ΔQuantity Demanded of Good A) / (%ΔPrice of Good B)
– Interpretation:
– XED > 0 → substitutes (price up for B increases demand for A)
– XED 1 (elastic): price cuts can increase total revenue; raising price likely reduces revenue.
– If |PED| 1 and price elasticity > 1 (consumers reduce purchases sharply with price increases). But some luxury brands with strong differentiation can be relatively inelastic.
– What are the 4 main types of elasticity?
Price elasticity of demand, income elasticity of demand, cross-price elasticity of demand, and price elasticity of supply.
– What is price elasticity?
Price elasticity (of demand) is the percent change in quantity demanded divided by the percent change in price. It measures demand sensitivity to price.
– What is the elasticity of demand formula?
PED = (%ΔQuantity Demanded) / (%ΔPrice). For discrete changes use the midpoint (arc) formula to reduce bias.
Practical checklist for managers (quick)
– Estimate elasticity by segment.
– Run price experiments (A/B) before system-wide price moves.
– Use elasticity to forecast revenue and margin impacts.
– Adjust marketing/promotions to segments with high elasticity.
– Invest in differentiation and loyalty to reduce elasticity where profitable.
– Reassess elasticity over time and after product changes.
The bottom line
Elasticity is a foundational concept for understanding how markets respond to price, income and related changes. Measuring and applying elasticity allows firms and policymakers to predict behavioral responses, set better prices, and manage revenue and welfare outcomes. Practical implementation combines data analysis (or experimentation) with strategy: segment customers, choose pricing tactics, monitor results, and adapt as market conditions change.
Source
Adapted from Investopedia: “Elasticity” by Jiaqi Zhou — https://www.investopedia.com/terms/e/elasticity.asp (accessed 2025).