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.

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.

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
Tech stocks teeter as US Treasury bond yields rise
Tech stocks

Tech stocks teeter as US Treasury bond yields rise

The realisation that central banks are about to tighten their monetary policies caused a sell-off in the tech-heavy Nasdaq stock index and the biggest…
14 Jan 2022