price elasticity
The measure of how sensitive consumer demand is to changes in price. Elastic demand means price changes significantly affect quantity demanded; inelastic means little effect.
Example
“Gasoline has inelastic demand — people buy nearly the same amount even when prices rise significantly.”
Memory Tip
ELASTIC demand = stretches (changes a lot) when price changes. INELASTIC = barely moves.
Why It Matters
Understanding price elasticity helps you make smarter purchasing decisions and recognize when you have negotiating power. When you know whether your demand for something is elastic or inelastic, you can better manage your budget and avoid overpaying for essentials that you will buy regardless of price.
Common Misconception
Many people assume that all necessary items like food and medicine have completely inelastic demand, but this is not entirely accurate. While people do need these items, they can often switch brands, buy generic versions, or adjust quantities based on price changes, making demand somewhat elastic.
In Practice
Consider coffee prices at different locations. If your local coffee shop raises prices from 3 dollars to 4 dollars per cup, you might switch to a competitor or make coffee at home, showing elastic demand. However, if insulin for diabetes increases in price, patients will likely continue buying it at nearly the same quantity because they need it to survive, demonstrating inelastic demand.
Etymology
PRICE (cost to consumer) ELASTICITY (stretchiness, responsiveness). How much demand STRETCHES in response to PRICE changes.
Common Misspellings
Learn economics & finance from top universities
Related Terms
More in economics
Other economics terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.