Elastic demand definition
/What is Elastic Demand?
Elastic demand is when the price of a product has a large impact on the quantity purchased. A product is said to have elastic demand if sales drop sharply in response to an increase in price, or sales spike when prices are decreased.
From a pricing formulation perspective, elastic demand is of great concern. If it is not possible to increase prices without experiencing a sharp decline in sales volume, a business must rely on cost reductions or expansion into new sales regions to generate a profit over the long term. Price elasticity is particularly common when the products of competing companies are not well differentiated, or where substitute products are readily accessible.
Conversely, a company is in a much better position when customers are willing to accept price increases and still maintain approximately the same sales volume, thereby increasing company profits. Inelasticity arises when a company can clearly separate the features of its products from those of competitors, and customers assign value to these differences.
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How to Calculate Price Elasticity
Elastic demand can be calculated by dividing the percentage change in unit demand by the percentage change in price. The formula is as follows:
% Change in unit demand ÷ % Change in price = Elasticity of demand
Elastic Demand vs. Inelastic Demand
In some cases, the quantity sold does not change much, even when there is a significant change in price. If so, this is called inelastic demand. A product is said to be price inelastic if the preceding ratio is less than 1, and price elastic if the ratio is greater than 1. Revenue should be maximized when you can set the price to have an elasticity of exactly 1.
Terms Similar to Elastic Demand
Elastic demand is also known as price elasticity of demand.