Price elasticity: basics

In short: Price elasticity measures how strongly the quantity demanded or supplied of a good changes when its price changes. This concept helps explain why some goods react strongly to price changes and others barely at all.

In more detail: Elastic demand reacts strongly to price changes, while inelastic demand reacts only weakly.

In detail

• Calculation: Price elasticity results from the percentage change in quantity divided by the percentage change in price.
• Elastic goods: Luxury goods and products with many substitutes usually react strongly to price changes, since consumers can easily switch.
• Inelastic goods: Staple foods, essential medications, and addictive products like tobacco often show only small reactions to price changes.
• Time factor: Elasticity is often lower in the short term than the long term, since consumers only gradually adjust to price changes, for example through behavioural shifts.
• Income share: Goods that make up a large share of available income tend to have higher price elasticity than low-value everyday goods.
• Business relevance: Companies use knowledge of price elasticity to assess price changes specifically for their effect on revenue and profit.
• Tax policy: The government considers price elasticity when setting consumption taxes, since inelastic goods allow higher tax revenue without a strong decline in demand (angebot-und-nachfrage, monopol-oligopol-und-wettbewerb).