Elastic and inelastic are both economic concepts used to describe changes in the buyer’s and supplier’s behavior in relation to changes in price. Similar in meaning to the expansion of a rubber band, elastic refers to changes in demand/supply that can occur with the slightest price change and inelastic is when the demand/supply does not change even when prices change. The two concepts are rather simple and easy to understand. The following article provides an outline of each with clear examples of what type of products may have elastic and elastic demand/supply.
What is Elastic in Economics?
When a change in price results in a large change in the quantity that is supplied or demanded of a particular product, it is referred to as being ‘elastic’. Elastic goods are very price sensitive, and demand or supply can vastly change with price fluctuations. When the price of an elastic good increase, demand will fall rapidly, and supply will tend to increase, the fall in price will result in high demand and lower supply. These conditions may become equal as they reach an equilibrium point where demand and supply are equal (price at which buyers are willing to buy and sellers are willing to sell). Goods, which are elastic, are usually goods which have easily replaceable substitutes where if the price of the product is increasing the consumer can easily switch to its substitute. For example, if the price of butter increases consumers can easily switch to margarine, as it is with coffee and tea, which are also direct substitutes.
What is Inelastic in Economics?
When a change in price does not greatly affect the quantity demanded or supplied, that particular product is referred to as ‘inelastic’. Inelastic goods are less sensitive to price changes and these conditions are witnessed in products that are necessities to a consumer such as fuel, bread, basic clothing, etc. Specific types of products can also become inelastic. For example, a critical life saver drug for disease can become inelastic as consumers will pay any price to obtain it. Habit forming good such as cigarettes can also become inelastic and addicted consumers will purchase cigarettes regardless of the price increases as long as their income allows them to do so.
Elastic vs Inelastic
Both concepts refer to the sensitivity that a product’s demand and supply will have to changes in price. The formula for calculating elasticity is
Elasticity = (% change in quantity (demanded or supplied) / % change in price)
If the answer is greater than one, then the demand or supply is elastic, if the answer is less than one then it is considered to be inelastic.
Summary
• Elastic and inelastic are both economic concepts used to describe changes in the buyer’s and supplier’s behavior in relation to changes in price.
• When a change in price results in a large change in the quantity that is supplied or demanded of a particular product, it is referred to as being ‘elastic’. When a change in price does not greatly affect the quantity demanded or supplied, that particular product is referred to as ‘inelastic’.
• Goods, which are elastic, are usually goods which have easily replaceable substitutes, and goods, which are inelastic, are usually necessities or goods which are habit forming.