Advertisement

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.

Advertisement - Article continues below

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
Advertisement

Recommended

Economic indicators
Glossary

Economic indicators

An economic indicator is any statistic that allows us to analyse how the economy is performing or is likely to perform in future.
31 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Barbell strategy
Glossary

Barbell strategy

A “barbell… investment strategy means weighting a portfolio towards the two extreme ends of an asset class with nothing in the middle.
8 Jul 2020

Most Popular

Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Too embarrassed to ask: what is “real return”?
Too embarrassed to ask

Too embarrassed to ask: what is “real return”?

MoneyWeek's latest "too embarrassed to ask” video explains what a real return is and why it's so important for investors.
5 Aug 2020