In the context of elasticity, particularly economic elasticity such as price elasticity of demand, elastic refers to a situation where a change in one variable causes a proportionately larger change in another. Specifically, regarding price elasticity of demand, elastic demand means that a change in the price of a good or service leads to a significant change in the quantity demanded.
Understanding Elastic Demand
The concept of elasticity is crucial to understanding how markets react to changes. When we say something is 'elastic', we mean it's sensitive to changes.
- Price Elasticity of Demand: This specifically examines how a change in price affects the quantity of a product that consumers are willing to buy.
- High Elasticity: A product has high elasticity, meaning its demand is significantly impacted by price changes. If the price increases slightly, demand decreases a lot, and vice-versa. This is referred to in the provided reference as "a large change".
- Low Elasticity (Inelasticity): Conversely, a product has low elasticity (or is inelastic) when changes in its price result in relatively small changes in the quantity demanded. As the reference states: "the change in quantity demanded due to a change in price is small."
Elastic vs Inelastic: A Comparison
To understand 'elastic', it helps to compare it with its opposite, 'inelastic':
| Feature | Elastic Demand | Inelastic Demand |
|---|---|---|
| Price Change | A small price change | A price change |
| Quantity Change | Causes a large change in quantity | Causes a small change in quantity |
| Consumer Sensitivity | Consumers are very sensitive to price changes | Consumers are not very sensitive to price changes |
| Examples | Luxury goods, non-essential items | Essential goods, like medicine, gasoline |
Examples of Elasticity
- Example of High Elasticity: Imagine the price of a specific brand of a very popular clothing line significantly increases. Many consumers would likely switch to alternative brands and the demand for that specific brand may substantially decrease; meaning its demand is elastic to price change.
- Example of Low Elasticity: Conversely, an increase in the price of a life saving drug might not reduce demand significantly. People who need the medication will likely continue to buy it despite the price change; meaning its demand is inelastic to price change.
Practical Insights
- Business Decisions: Understanding the elasticity of a product can help businesses make pricing decisions.
- Government Policies: Governments use elasticity to predict how taxes and subsidies will impact the market.
- Consumer Behavior: Elasticity helps understand how consumers react to economic changes.
In conclusion, 'elastic' in elasticity describes the sensitivity of one variable to changes in another, specifically a large change in quantity demanded in response to a change in price.
