Definition:
Per (Gans et al.), elasticity is a measure of how responsive a variable is to a change in one of its factors. Types include demand elasticity, income elasticity, and cross price elasticity of demand.
Why It Matters:
One reason elasticity is important to understand is that it helps to predict consumer’s behaviour. This helps businesses with their pricing strategies.
Example:
An example of price elasticity of demand: If the price elasticity of demand of a good is 2, then a 1% change in price will result in a 2% change in quantity demanded.
Typically non-essentials, like a spa have highly elastic demand, compared to eggs with inelastic demand.
Limitation
One limitation of elasticity, per “Price Elasticity - the Decision Lab” (2025), is it assumes consumers are rational, which is the biggest criticism of economics. Reality isn’t black and white, instead it’s shaped by cognitive biases, emotions, and context. For example, our willingness to pay shifts with expectations and how we frame value in the moment, like how it feels to pay $7 for a coffee in the morning and then paying $7 for a cocktail at night.
Further
Demand elasticity is how responsive demand is to a change in a factor (price, income, price of other goods).
There are 3 types of demand elasticity (Gans et al.):
Price elasticity of demand (PED)
Income elasticity of demand (IED)
Cross-price elasticity of demand (CED)
Work cited:
Gans, Joshua, et al. Principles of Microeconomics. South Melbourne, Victoria, Australia, Cengage Learning Australia, 2021.
“Price Elasticity - the Decision Lab.” The Decision Lab, 2025, thedecisionlab.com/reference-guide/economics/price-elasticity.
