Price elasticity

Price elasticity measures how much the consumer demand for a good changes in response to price changes.

When price changes of a good have a large impact on demand, the demand is considered elastic.

If price changes only slightly impact demand for a good, the demand is considered inelastic.

Changes in consumer demand for a good in response to price changes for that good can be quantified using Price Elasticity of Demand (PED).

Demand for luxury items (like iPhones or premium liquors) and other products with many substitute goods are more likely to be elastic. Why is that? Because consumers have alternatives.

The impact on consumer demand across products in response to price changes for substitute goods can be quantified using Cross-Price Elasticity of Demand (CPED).

Demand for goods like food, water, electricity, and gasoline, don’t respond much to price changes. These types of goods are more likely to be inelastic because consumers have no alternative.

The way a market is defined can also have a huge impact on price elasticity within that market. For example, demand for flights between major US cities may be inelastic - the distances are vast and the only alternatives are much more time consuming. In the Japan intra-city transit market, high speed rail is a viable substitute good. In that market, the demand for flights is elastic.

Price elasticity can also vary based on how long of a period is being analyzed. Day-to-day, demand for gasoline is inelastic; people still need to get to work and do errands. Over several decades as people will continue to adopt greener alternatives such as electric vehicles, micromobility, and improved public transit. This will increase the elasticity of consumer demand for gas.