Elastic Demand
What is Elastic Demand?
Elastic demand is when the quantity demanded changes more than the price changes.
In elastic demand, the percentage change in quantity demanded is greater than the percentage change in price. This means that consumers are very sensitive to price changes. Goods with many substitutes, such as luxury goods, often have elastic demand.
Elastic Demand: a worked example
A streaming service cuts its monthly plan from $15 to $12, a drop of 3/15 = 20 percent. Subscribers rise from 40,000 to 56,000, a jump of 16,000/40,000 = 40 percent. Price elasticity of demand is 40/20 = 2, comfortably above 1, so demand is elastic over this range. Now check the money: revenue was 15 x 40,000 = $600,000 a month and is now 12 x 56,000 = $672,000. Revenue rose by $72,000 even though the price fell, which is exactly what elastic demand does to a price cut.
The mistake students make with elastic demand
Students decide a demand curve is elastic once and then label the entire line that way. On a straight-line demand curve, elasticity is not constant: it is above 1 near the top, exactly 1 at the midpoint, and below 1 near the bottom, even though the slope never changes. The mistake is tempting because slope looks like it ought to be elasticity. Slope compares dollars to units, while elasticity compares percentages, and the same $1 is a far bigger percentage of a low price.
Elastic Demand questions
How do you know if demand is elastic without calculating elasticity?
Demand is elastic if a price cut raises total revenue, which is the total revenue test. Multiply price by quantity before and after the change: revenue moving opposite to price means elastic, revenue moving with price means inelastic, and revenue holding steady means unit elastic. It works because under elastic demand the percentage gain in quantity outruns the percentage loss in price, so the two multiply to a bigger number.
Does a flatter demand curve mean demand is more elastic?
A flatter demand curve is more elastic than a steeper one only when both are drawn on the same axes and compared at the same price and quantity. Flatness on its own proves nothing, because rescaling an axis or switching units changes how steep a curve looks without changing a single percentage. Elasticity is a ratio of percentage changes, so trust the numbers over the picture.
Why is demand for one brand more elastic than for the whole product category?
Demand for a single brand is more elastic than demand for its whole category, because switching brands is easy while giving up the category is hard. If one tortilla chip brand raises its price 10 percent, buyers reach for the bag beside it, so that brand's quantity sold can fall by well over 10 percent. Raise the price of every tortilla chip at once and buyers have fewer escapes, so quantity falls proportionally less.
Formula / Example
This is the live Elasticity sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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