Elasticity refers to a concept in economics that explains how one variable reacts to changes in another. Usually, it’s about how the demand for a product shifts when its price goes up or down. This is often called demand elasticity.
The elasticity of a good or service can differ based on how many close substitutes are out there, its relative cost, and how much time has passed since the price change happened. The primary types of elasticity are price elasticity, income elasticity, and cross-product substitutions.
Learn more about Elasticity
It is a key economic concept, especially for sellers of products or services, as it shows how much of a product or service buyers will consume when prices fluctuate.
When a product is elastic, a price change leads to a quick shift in the quantity demanded. On the other hand, if a product is inelastic, the quantity demanded hardly changes even if the price does. For elastic goods, we see demand rise when prices drop and fall when prices go up.
Businesses in highly competitive markets usually offer elastic goods or services. This is because they are often price-takers, meaning they have to go with the current market prices. When the price of a good or service hits the elastic point, both sellers and buyers swiftly adjust their demand accordingly.
Elasticity also provides valuable insights for consumers. If the market price of an elastic product falls, companies are likely to cut back on the quantity of goods or services they are willing to supply. Conversely, if the market price rises, companies are likely to increase the amount they are willing to sell. This idea is referred to as the elasticity of supply, which is crucial for consumers who need a product and worry about possible shortages.
The Real Example
Generally, elastic goods are either non-essential items or services, or they have easily accessible alternatives provided by competitors. The airline sector is a prime example of elasticity due to its competitive nature. When one airline raises its ticket prices, passengers can simply switch to another airline, leading to a drop in demand for the airline that increased its fares. On the other hand, gasoline is a case of a relatively inelastic good since most consumers have to purchase fuel for their cars, no matter what the market price is.
Conclusion
Generally, elasticity is about how one variable reacts to changes in another. In the world of economics, it usually pertains to demand elasticity, which is all about how demand shifts in response to changes in various factors like price, income, and so on. The flip side of elasticity is inelasticity. When a product or service is inelastic, its demand hardly changes no matter how other factors fluctuate.