What's the difference between elastic and inelastic demand?
If a 10% price increase cuts quantity by 20%, elasticity is 2—elastic. If quantity falls only 5%, it's 0.5—inelastic. Demand is more elastic when there are close substitutes (coffee brands), when the item is a big share of the budget (vacations) and over longer time periods. Necessities with few substitutes—gasoline in the short run, cigarettes, insulin—are inelastic (Mankiw, 2021).
How does elasticity affect revenue?
| Elasticity | Raise price → revenue | Example |
|---|---|---|
| Elastic (>1) | Falls | Restaurant meals, branded apparel |
| Unit elastic (=1) | Unchanged | — |
| Inelastic (<1) | Rises | Cigarettes, short-run gasoline |
That's why cigarette taxes raise revenue and why airlines charge business travelers (inelastic) more than vacationers (elastic). Price changes also shift consumer surplus.
FAQ
- Why is elasticity negative?
- Price and quantity move in opposite directions, but economists usually quote the absolute value.
- Is there a supply elasticity?
- Yes—it measures how quantity supplied responds to price.
Sources reviewed: 2026-10-25
References
- Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage.