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Elasticity is the responsiveness of one variable when another variable changes. It calculates how much supply or demand shifts when there is a change in:
Let’s say Karan is a local fruit vendor. He sells mangoes at ₹100 per dozen. Due to market forces, he increases the price to ₹120 per dozen. Consequently, buyers respond by lowering their order sizes.
Also, some switch to buying papayas priced at ₹70 per dozen. The decline in mango sales due to a price increase is a practical example of elasticity.
It provides us with a way to understand how we respond to changes in price, income, or the price of other goods.
In simple words:
It is a key concept that helps producers, retailers, and policymakers plan better.
Read More – What is Elasticity of Demand? Types, Formula & Examples
Types Of Elasticity In Economics
Elasticity is mainly classified into four types. Each type focuses on how different factors affect demand or supply.
This is the most common type of elasticity. With this concept, you can understand how buyers react when product prices go up or down, affecting the quantity purchased.
Formula:
Price Elasticity of Demand = % Change in Quantity Demanded ÷ % Change in Price
Example:
The price of stainless steel bottles goes up from ₹200 to ₹240 (a 20% increase). Due to this, the quantity demanded falls from 1000 units to 800 units (a 20% fall).
PED = −20% ÷ 20% = −1
So, the demand in the example is said to be unit elastic.
It shows how the quantity demanded changes as consumers' income changes.
Formula:
Income Elasticity of Demand = % Change in Quantity Demanded ÷ % Change in Income
Example:
If your income rises by 15%. Also, the demand for air conditioners goes up by 30%:
YED = 30% ÷ 15% = 2
So, the demand in the example is said to be for luxury goods.
You can use it to measure how the demand for one good responds when the price of another good changes.
Formula:
Cross Elasticity of Demand = % Change in Demand for Good A ÷ % Change in Price of Good B
Example:
If the price of Pepsi increases by 10%. Due to this, the demand for Coke increases by 6%:
XED = 6% ÷ 10% = 0.6
So, the demand in the example is said to be for substitute goods.
It refers to how supply changes in response to a change in price. It is beneficial for producers and farmers.
Formula:
PES = % Change in Quantity Supplied ÷ % Change in Price
Example:
If wheat prices increase by 30%. Due to this, farmers increase supply by 60%:
PES = 60% ÷ 30% = 2
Unit Elastic
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So, the above-mentioned example indicates elastic supply.
If you think that elasticity is just theory, then you are wrong. It is applied in the real world. It plays an important role in everyday business, taxation, and planning.
Also Read - What is Managerial Economics? Meaning, Scope & Decision-Making Role
1. Helps Businesses Set Prices
It helps businesses decide the right price for their products.
Usually, inelastic goods are targeted for taxes (like petrol and cigarettes), since consumers do not cut down usage quickly. It ensures steady tax income.
From the above-mentioned table, you can see the impact of goods and taxes.
You might know that elasticity helps producers understand the goods they need to focus on.
Most of us know that as income increases, demand for certain goods rises. Retailers and marketers are able to plan better by observing income elasticity. Also, by predicting which goods will see a surge in demand.
It gives insights into how consumers react to changes in price, income, or competitor pricing.
The following are the real-world examples of elasticity:
Elasticity makes it easy for you to understand how markets function. You can learn how people respond when prices or incomes change. It helps businesses, sellers, and governments make informed choices.
Whether it's adjusting prices, planning supply, or setting taxes, if you know how elastic or inelastic a product is, it can help you make smarter decisions.
If you have an understanding of the elasticity concept, then navigating the changing economy and planning better will become easier for you.
1. Are all necessities inelastic?
Most are, especially in the short term, like salt and milk.
2. What does it mean if PES is high?
Supply can easily increase with rising prices.
3. Why do governments tax inelastic goods?
They ensure steady revenue despite price hikes.
4. Which goods are usually income elastic?
Luxury goods like high-end electronics and cars.
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