Glossary

Price elasticity

In general, the higher the price of a product the lower the demand for it. The extent to which this is true for each product is referred to as price elasticity.

In general, the higher the price of a product the lower the demand for it. However, this is truer in some cases than in others, and the extent to which it is true for each product is referred to as price elasticity.

If a 1% drop in a product's price produces a 1% increase in demand, the price elasticity of demand is 1.0. If it produces a 2% increase in demand, the price elasticity of demand for the product is 2.0 (the percentage change in demand divided by the percentage change in price). Most consumer goods and services have a price elasticity between 0.5 and 1.5, The closer to zero, the more price 'inelastic' the demand is said to be.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Demand for staple foods such as salt, or for addictive goods such as cigarettes and alcohol - which people always need or want regardless of price increases - is inelastic. This, of course, is why they are such great tax revenue raisers. Demand for luxury goods or specialist foods on the other hand tends to be fairly price elastic as buying them can easily be put off or cancelled, so demand falls as the price rises.

Advertisement

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/520598/money-minute-thursday-16-january-a-batch-of-company-results
Economy

Money Minute Thursday 16 January: a batch of company results

Today's Money Minute looks ahead to results from a host of UK companies, plus the latest unemployment figures from the US.
15 Jan 2020