In economics, "elasticity" is a term that identifies how closely two variables, such as price and consumption, are linked. Many staple goods, such as 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. This phenomenon can hold true in the opposite case as well: Elasticity is still exactly 1 if a 10 percent decrease in income equates to a 10 percent decrease in your purchase of a certain good. When elasticity is less than 1, the good is relatively inelastic — at least in the short term. Over the long term, most goods are elastic. Even if the price of gas increases 20 percent, for example, you still have to drive to work, so you consume the same amount. The next time you buy a car, however, you'll likely look for something more fuel efficient to save money.
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.
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 good. 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.
In some cases, elasticity extends to different competing products rather than simple variations in purchasing behavior for one product based on income. For example, if two gas stations are in competition and one lowers its price by 1 percent, consumption at that gas station will increase by much greater than 1 percent regardless of consumer income. On the other hand, if the price of gas at both doubles, consumers may choose to purchase a bus ticket instead. Demand for the bus is elastically linked to the price of its alternatives.
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