# Elasticity: What It Means in Economics, Formula, and Examples

## What Is Elasticity?

Elasticity is a term used in economics to describe responsiveness in one variable to changes in another. Typically, elasticity is used to describe how much demand for a product changes as its price increases or decreases. This is also known as [demand elasticity](https://www.investopedia.com/terms/p/priceelasticity.asp).

Elasticity for a good or service can vary according to the number of close substitutes available, its relative cost, and the amount of time that has elapsed since the price change occurred. The main [types of elasticity](https://www.investopedia.com/ask/answers/040815/what-are-some-examples-demand-elasticity-other-price-elasticity-demand.asp) include price, income, and cross-product subsitutions.

### Key Takeaways

*   Elasticity is an important economic measure that describes how responsive one variable is to changes in another.
*   Demand elasticity is particularly for sellers of goods or services, because it reflects how much of a good or service buyers will consume when the price increases or decreases.
*   Goods with elastic demand are those whose demand fluctuates based on factors like price, income, and other potential factors.
*   Goods with inelastic demand are those whose demand stays relatively stable even when other factors shift.

![Elastic](https://www.investopedia.com/thmb/hb4BSaXGkjTt0WILe59xdDgxvqs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/elastic.asp-final-5d32f70716b9479da59b530d7dee764b.png)

*— Investopedia / Julie Bang*

## Understanding Elasticity

Elasticity is an important economic measure, particularly for the sellers of goods or services, because it indicates how much of a good or service buyers consume when the price changes.

When a product is elastic, a change in price quickly results in a change in the [quantity demanded](https://www.investopedia.com/terms/q/quantitydemanded.asp). When a good is inelastic, there is little change in the quantity of demand even with the change of the good's price. The change that is observed for an elastic good is an increase in demand when the price decreases and a decrease in demand when the price increases.

Companies that operate in fiercely competitive industries provide goods or services that are elastic. This is because these companies tend to be [price-takers](https://www.investopedia.com/terms/p/pricetaker.asp), meaning they typically must accept prevailing prices. When the price of a good or service reaches the point of elasticity, sellers and buyers quickly adjust their demand for that good or service.

Elasticity also communicates important information to consumers. If the market price of an elastic good decreases, firms are likely to reduce the number of goods or services they are willing to supply. If the market price goes up, firms are likely to increase the number of goods they are willing to sell. This concept is known as elasticity of supply. It is important for consumers who need a product and are concerned with potential [scarcity](https://www.investopedia.com/terms/s/scarcity.asp).

## Real-World Examples of Elastic Goods

Typically, goods that are elastic are either unnecessary goods or services or those for which competitors offer readily available substitute goods and services. The airline industry is elastic because it is a competitive industry. If one airline decides to increase the price of its fares, consumers can use another airline, and the airline that increased its fares will see a decrease in the demand for its services. Meanwhile, gasoline is an example of a relatively inelastic good because many consumers have no choice but to buy fuel for their vehicles, regardless of the market price.

## What Is Perfectly Elastic?

When a good or service is perfectly elastic, demand for it is extremely sensitive to changes in price. This is the inverse of extreme inelasticity, in which demand is fixed regardless of fluctuations in price.

## What Are Types of Demand Elasticity?

In general, demand elasticity refers to change in demand for a product in response to some other variable. Typically, that variable is price. However, there are other types of demand elasticity, as well. One might want to measure demand elasticity in response to income. This would reflect changes in demand for a product based on how incomes fluctuate. Another indicator is demand elasticity in respones to cross-price, which reflects changes in demand based on how prices for competitor products move.

## What Are Inelastic Goods?

Inelastic goods tend to see little change in demand regardless of price fluctuations. Typically, these goods are essentials or necessities that consumers need even if prices rise or incomes fall. Examples may include staples like bread, housing, health care, and gasoline, as mentioned above.

## The Bottom Line

In general, elasticity refers to the responsiveness of one variable to changes in another. In economics, this most frequently refers to demand elasticity, or how demand fluctuates based on changes in other factors, such as price, income, and more. The opposite of elasticity is inelasticity. When a good or service is inelastic, demand fluctuates very little regardless of changes in other factors.