In general economic terms, elasticity refers to how responsive a variable is to another variable. Most often, the term elasticity is applied to how demand for a product changes depending on the price. Mathematically, this is expressed as a ratio of the change in price to the change in quantity demanded.
Elasticity = Percent change in Quantity / Percent Change in Price
An elasticity value greater than one indicates that demand for the product is sensitive to price, while a value lower than one indicates insensitivity to price, making demand inelastic.
An important part of business is understanding to what degree a company’s product is elastic or inelastic. Medical supplies such as insulin for diabetics are fairly inelastic since people will always need them. Products with few competitors are also usually inelastic; this also applies to a brand with strong customer loyalty or social cache such as Apple. A company can rely on demand for an inelastic good not to change, allowing them to charge higher prices.
On the other hand, highly elastic products tend to be good or services that people will only purchase at a competitive price. Cheap novelty goods are an example, as well as products with many competitors and alternatives, such as many common food brands. If Pepsi drops prices, Coke will have to respond accordingly. Companies that produce elastic goods and services must compete over prices and maintain high sale volumes.
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