Elasticity (economics)

Building on the principles of consumer choice, this episode introduces the crucial concept of elasticity. We move beyond simply knowing that demand changes with price, and ask the critical question: 'by how much?' You will learn how economists measure the responsiveness of consumers to price changes through the price elasticity of demand. We'll break down the key differences between 'elastic' goods, where demand is highly sensitive to price, and 'inelastic' goods, where demand remains stable. This episode will show you why elasticity is a vital tool for businesses setting prices and for governments deciding which goods to tax.

Check your understanding

These are the same multiple-choice questions you will see in the Quiz section after you listen to the episode. Use them here to preview or review the answers.

What does the price elasticity of demand measure?

  1. The total amount of a good that consumers are willing to buy.
  2. The responsiveness of quantity demanded to a change in the price of a good.
  3. The direction in which the demand curve shifts when income changes.
  4. The price at which a firm will maximize its profit.
  5. The speed at which a market reaches equilibrium.

If a small percentage increase in the price of a product results in a large percentage decrease in the quantity demanded, the demand for this product is considered:

  1. Perfectly inelastic
  2. Inelastic
  3. Unit elastic
  4. Elastic
  5. Inferior

Which of the following products is most likely to have a highly INELASTIC demand?

  1. A specific brand of luxury sports car.
  2. A life-saving prescription medication with no substitutes.
  3. Tickets to a local concert with many other entertainment options.
  4. Organic spinach from a particular farm.
  5. A brand of soda.

A business sells a product with elastic demand. If it wants to increase its total revenue, what should it do to the price?

  1. Increase the price significantly.
  2. Keep the price the same but reduce production.
  3. Lower the price.
  4. Increase the price slightly.
  5. Price has no effect on total revenue.

Which of the following factors would likely make the demand for a good MORE elastic?

  1. The good is a necessity.
  2. There are very few or no available substitutes.
  3. A long period of time for consumers to adjust.
  4. The market for the good is very broadly defined (e.g., 'clothing').
  5. The good represents a very small portion of a person's income.

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