Elasticity is a term that describes how much the demand or supply for a product or service changes in relation to that product’s price. Each product on the market today has a different level of elasticity. Products considered to be necessities by a majority of consumers are typically less affected by price changes, causing them to be less elastic. By contrast, if consumers do not consider a product to be essential, they are likely to buy less of it if the price is increased, making that product elastic.
Examples of elastic products are coffee, airline tickets, and stocks. If there is a change in the price of an elastic product, it is likely to cause a shift in demand for that product. One factor that affects the elasticity of a product’s demand is the availability of close substitutes for the product. For example, if one coffee chain chooses to increase prices, consumers can easily switch to a new brand, causing demand for the now more expensive brand of coffee to decrease.
Examples of inelastic goods are water, electricity, phone service, and gasoline. These are goods that will not experience a large change in demand as a result of a price increase. Often this is because these goods fill a biological human need, such as water, or because there are no convenient substitutes for these products on the market, as is the case with gasoline.
There are several different ways to measure a good or product’s elasticity. Price elasticity of demand, income elasticity of demand, and elasticity of supply are three ways to measure specific dynamics relating to a product’s supply, demand, and price.
Price elasticity of demand measures how the demand for a product changes in relation to changes in the price of that product, assuming that all other factors remain constant. The formula for price elasticity of demand is:
Price Elasticity = (% change in quantity) / (% change in price)
Price elasticity is negative for most products. This means that as the price of a good increases, the demand for that good decreases. While rare, there are some products with positive price elasticity, meaning that as their prices increase, they are perceived as being more valuable, and are purchased more often. Examples of products that can have positive price elasticity are designer handbags, high end cars, and wine.
Income elasticity of demand measures how much demand for a good changes in relation to a change in an individual’s income, assuming that all other factors remain constant. This measure is often used by businesses to predict how changes in the market will affect their product sales. The formula to determine income elasticity of demand for a product is:
Income Elasticity = (% change in quantity demanded) / (% change in income)
This formula can be used to determine if a specific good is a luxury good or a necessity. The higher the absolute income elasticity of a good is, the more likely demand for that good is to change along with consumers’ income. If a product’s income elasticity is positive, it indicates that consumers are likely to spend more money on that product if their income increases. If the income elasticity of a product is negative, that indicates that consumers will spend less money on that product if their income increases. Examples of products with positive income elasticity are luxury cars, vacation packages, and high end clothing, shoes, and housewares. Examples of goods with negative income elasticity are low quality shoes and clothing.
Elasticity of supply is a measure of how much supply of a product changes in response to a change in the product’s price, assuming that all other factors remain constant. The formula to measure elasticity of supply is:
Elasticity of Supply = (% change in quantity supplied) / (% change in price)
If a product has a high elasticity of supply, the supply volume will increase when the demand and price increase for that product. Examples of products with highly elastic supply are mass market toys, electronics, and clothing, as these are all products that a manufacturer can supply more of on short notice. An example of a product with inelastic supply is a ticket to a concert, as the total amount of tickets available is typically unable to be increased.