What Is Elasticity in Economics?
Price Elasticity of Demand and Supply

In economics, people often want to know how buyers and sellers react when prices change. Do customers stop buying when a product becomes more expensive? Do producers increase production when prices rise? To answer these questions, economists use a concept called elasticity.

Elasticity is a key idea because it helps businesses set prices, helps governments design taxes and policies, and helps us understand how markets really work.

Meaning of Elasticity in Economics

Elasticity measures how much one economic variable responds to a change in another variable.

In simple words, elasticity shows how sensitive buyers or sellers are to changes in price, income, or other factors.

Although there are different types of elasticity, the most important and commonly used one is price elasticity, which focuses on how quantity changes when price changes.

There are two main types:

• Price elasticity of demand

• Price elasticity of supply

Price Elasticity of Demand (PED)

Definition

Price elasticity of demand measures how much the quantity demanded of a good changes when its price changes.

In simple terms, it answers this question:

If the price of a product changes, how strongly do consumers react?

Formula of Price Elasticity of Demand

[
\text{Price Elasticity of Demand} = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}
]

The value is usually negative because price and quantity demanded move in opposite directions. However, in practice, economists often ignore the negative sign and focus on the size of the number.

Types of Price Elasticity of Demand

1. Elastic Demand

Demand is called elastic when a small change in price leads to a large change in quantity demanded.

This usually happens for:

• Luxury goods

• Goods with many substitutes

Example:
If the price of one brand of sports shoes rises, buyers may easily switch to another brand.

In elastic demand:

• Elasticity is greater than 1

2. Inelastic Demand

Demand is called inelastic when a change in price causes only a small change in quantity demanded.

This is common for:

• Necessities

• Goods with few substitutes

Example:
People still buy basic food or medicines even if the price increases.

In inelastic demand:

• Elasticity is less than 1

3. Unitary Elastic Demand

Demand is unitary elastic when the percentage change in quantity demanded is exactly equal to the percentage change in price.

In this case:

• Elasticity equals 1

4. Perfectly Elastic Demand

In this situation, consumers are extremely sensitive to price changes.

Even a very small increase in price causes quantity demanded to fall to zero.

This is mostly a theoretical case and not common in real life.

5. Perfectly Inelastic Demand

Here, quantity demanded does not change at all, even if the price changes.

This is also mainly a theoretical situation.

Factors Affecting Price Elasticity of Demand

Several factors influence how elastic demand is:

1. Availability of substitutes
If close substitutes exist, demand tends to be more elastic.

2. Nature of the good
Luxury goods usually have elastic demand, while necessities have inelastic demand.

3. Proportion of income
If a good takes a large part of a person’s income, demand is usually more elastic.

4. Time period
Over a longer period, people can adjust their behavior, so demand becomes more elastic.

Importance of Price Elasticity of Demand

Price elasticity of demand helps:

• Firms decide how much to change prices

• Governments estimate the effect of taxes

• Businesses predict how sales will respond to price changes

For example, if demand for a product is inelastic, a seller may increase the price and still earn higher total revenue.

Price Elasticity of Supply (PES)

Definition

Price elasticity of supply measures how much the quantity supplied of a good changes when its price changes.

In simple words, it shows:

How easily producers can change the amount they supply when price changes.

Formula of Price Elasticity of Supply

[
\text{Price Elasticity of Supply} = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}
]

Unlike demand, price and quantity supplied usually move in the same direction, so the value of elasticity of supply is positive.

Types of Price Elasticity of Supply

1. Elastic Supply

Supply is called elastic when producers can increase or decrease production easily in response to price changes.

In elastic supply:

• Elasticity is greater than 1

Example:
Manufactured goods where factories can raise output using existing machines.

2. Inelastic Supply

Supply is inelastic when quantity supplied changes only a little after a price change.

In inelastic supply:

• Elasticity is less than 1

Example:
Agricultural products in the short run, because crops take time to grow.

3. Unitary Elastic Supply

Supply is unitary elastic when the percentage change in quantity supplied is equal to the percentage change in price.

Elasticity equals 1.

4. Perfectly Elastic Supply

Producers are willing to supply any amount at one price but none at a different price.
This situation is mainly theoretical.

5. Perfectly Inelastic Supply

Quantity supplied is fixed and cannot be changed, regardless of price.

For example, land in a particular location is almost perfectly inelastic in supply.

Factors Affecting Price Elasticity of Supply

1. Time period
Supply is more elastic in the long run because firms can expand factories, buy machines, and train workers.

2. Availability of inputs
If raw materials and labor are easily available, supply becomes more elastic.

3. Spare production capacity
If firms have unused machines or workers, they can respond more easily to price changes.

4. Nature of the product
Products that can be produced quickly usually have more elastic supply.

Importance of Price Elasticity of Supply

Price elasticity of supply helps to:

• Understand how quickly producers can respond to market changes

• Predict shortages or surpluses

• Plan production and investment decisions

For example, if supply is very inelastic, a sudden increase in demand can lead to a sharp rise in price.

Conclusion

Elasticity is one of the most important tools in economics because it explains how strongly buyers and sellers react to changes in prices.

Price elasticity of demand shows how sensitive consumers are to price changes, while price elasticity of supply shows how flexible producers are in changing output when prices change.

Understanding these two concepts helps businesses make better pricing decisions, helps governments design effective policies, and helps students clearly understand how markets adjust to change. In short, elasticity connects price movements to real human and business behavior in the marketplace.