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What is elasticity of demand?

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Quick Answer

Elasticity of demand is an economics term meaning the relative change in quantity demanded for a good based on a particular price change. High price elasticity means that a particular change in price causes consumers to significantly reduce the amount of goods purchased.

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When price elasticity is extremely high, a price increase often causes consumers to dramatically reduce volume and to seek alternative product options. In contrast, low price elasticity means customers are less price sensitive. Therefore, an increase in price would have a relatively modest impact on the level of goods demanded. Business operators evaluate price elasticity to ensure optimal pricing strategies for generating revenue and profit.

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.

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