Elastic demand, also known as the price elasticity of demand, describes the price sensitivity of a particular good. When a product has elastic demand, a percentage change in price is followed by a larger, inverse percentage change in the quantity demanded. Inelastic demand is the opposite of elastic demand.
Elastic demand limits the profit-seeking seller's ability to increase the price of a good because an increase in price causes consumers to purchase less of that good. Alternately, the seller who decreases the price of a product with elastic demand experiences an increase in the quantity demanded. Whether or not the increased quantity demanded yields increased profits depends on the price structure of the particular good.
Several factors affect demand elasticity. The number of substitutes, whether the product is a luxury versus a necessity, and the percentage of income spent on the product are three of the most impactful factors. Demand elasticity is greater for goods that have many substitutes than it is for goods that are unique; luxury goods have more demand elasticity than necessities; and the more of a consumer's income a good requires, the higher the demand elasticity.
The concept of price elasticity was developed by economist Alfred Marshall in the nineteenth century.