In economics, "elasticity" is a term that identifies how closely two variables, such as price and consumption, are linked. Many staple goods like gasoline or bread are relatively inelastic over the short term. Even if prices increase, people will continue to purchase roughly the same amount because they need the good. Elastic goods have a much more visible and direct relationship between price and consumption behavior.
For consumer goods, elasticity can be measured by comparing a change in income with a change in purchasing behavior. If your income increases by 10 percent and you purchase 10 percent more of a certain good, the elasticity is exactly 1.
Let's take another example. The more easily a customer can substitute one product that's getting more expensive for another, the more its cost will drop. This means that the price is elastic.
The Luxury Industry: A Source of Elastic Goods
Luxury goods tend to be highly elastic, with an elasticity of demand greater than 1. Luxuries, such as consumer electronics, jewelry, high-priced cars and fashionable clothes, tend not to have a linear relationship with income.
Earning 5 percent more does not mean you'll buy 5 percent more jewelry. Instead, once your income reaches the point at which you can afford jewelry or a fancy car, you may buy twice as much jewelry as before even though your income has not doubled. Similarly, luxury goods are often the first items scaled back when income drops.
Are Inferior Goods Elastic?
At the other end of the scale, inferior goods are also highly elastic but have an inverse relationship with income. As your income increases, you are less likely to buy the product.
Consider the case of a college student living off of ramen and boxed mac and cheese. As his income increases and he can afford better food, his consumption of these products will drop very sharply; on the other hand, if the student's income decreases further, he will likely tend to eat more and more of these goods, sacrificing more expensive alternatives. This is just one of the many examples of elastic products.
What Is Cross-Price Elasticity?
Cross-price elasticity refers to how the changes in relative prices within a market will affect the demand. This theory can be applied to both complementary and substitute products.
For example, if a particular brand of cereals becomes more expensive, customers will choose a different brand that costs less. The demand for that product will go up. In this case, cross-price elasticity will be positive.
There are many theories and concepts related to elasticity. As a business owner, it's important to know the characteristics of elastic goods and plan your marketing strategy accordingly. This will allow you to adjust the price and customize your offers based on customer demand.