How much does a cappuccino cost these days at your favorite cafe? If it went up another $1, would you still include it in your daily commute, or go back to your home-made French press? The guy you see on your commute might shrug at the difference, but now you have a caffeine crisis. This price change and how you respond to it are at the core of price elasticity, defining your sensitivity as a consumer to the cost of coffee. 

Simply put, price elasticity measures how much the demand for a product changes when its price changes.¹ If there is a small increase in price that leads to a large drop in demand, the item is price elastic—demand stretches like a rubber band when the price changes. If the demand stays about the same despite changes in price, the item is price inelastic, and the rubber band-ness isn’t so present. Some more elastic products might include luxury brands or replaceable goods, while inelastic ones may include gas or medicine. Price elasticity isn’t only for economists: it helps businesses, policy analysts, and behavioral scientists alike identify patterns in how people respond to price shifts and design for real-world choices.²

How does price elasticity work?

Price elasticity is often expressed as the percentage of change in the quantity of a product asked, or demanded for, divided by the percentage of change in price.³ As the most ubiquitous way of measuring how sensitive we are to prices, another simple way of understanding price elasticity is how a change in demand is proportional to a change in price. Going back to our rubber band analogy, high price elasticity means the demand can stretch easily with small changes in price. If our rubber band is stiff, it’s hard to alter much at all, like price inelastic demand. In this context, we can think of elasticity as describing how responsive two economic variables are to each other.⁴

If your cappuccino goes up or down slightly in price, demand doesn’t always change much. Why? Often it’s because there isn’t a perfect substitute that feels worth the hassle—so we keep buying, even if the price shifts. Theoretically, we could just pick a cheaper café, brew at home, or switch to tea. But in practice, we’re creatures of habit. For many of us, the same coffee shop is part of our daily routine, and that routine feels harder to change than swallowing the extra dollar. That said, price elasticity depends on the consumer. If coffee is a small daily treat, we might absorb small price hikes. But for someone budgeting carefully or less attached to their caffeine ritual, a higher price could quickly push them toward alternatives.

On the other hand, when the price is elastic, the amount of demand for a product changes significantly when the prices change.² In other words, the amount of demand strays far from its original point, whereas a smaller change in the volume of purchases can be anticipated when the price of a good is inelastic. For economics students (or anyone else curious to understand how this works), price elasticity can be made even more intuitive by examining its mathematical expression:

Price elasticity (of demand) = % change in quantity demanded / % change in price

Types of price elasticity of demand, with examples

In theory, price elasticity can range numerically from zero all the way to infinity. By calculating the change in amount demanded divided by the percent change in price, we can see not only how elastic a product or service is—but how consumers alter their decision-making accordingly:^1,2,3 

Price elasticity is not the same as demand elasticity, so it's worth noting their distinction.⁵ While price elasticity looks at how demand changes for a good or service relative to its price, demand elasticity is a broader concept that allows us to think about how demand changes due to numerous other factors, like the type of product, price level, how easy it is to get an alternative, and how much the consumer makes. In these cases, there’s a clear difference between generic name brands vs. luxury items in their demand elasticity levels.

What factors impact price elasticity? 

Nowadays, there are seemingly countless factors that could impact how elastic a price is. Many of these factors are out of the control of a business at the hands of the market, while some can be more easily influenced. Let’s take a closer look at some of the usual factors that have an impact:^{1, 4}

When price elasticity meets behavioral science 

While traditional models of economics assume the rational consumer, behavioral science reveals the irrational self that emerges from our purchases. How people respond to changes is not only about price logic, it's about emotional states, perceptions of fairness, and individual spending habits. We’re not objective consumers; we assign subjective value to our money through mental accounting, which causes us to deviate from patterns predicted by economic principles like price elasticity. Though price elasticity tries to predict how demand should shift with cost, our idiosyncratic habits impact how we earn, save, or appraise money, making our responses more complex and less predictable. 

Elasticity: The degree to which consumer demand for a good or service responds to changes in its price. In the context of sneakers, inelastic demand means that even significant price increases may not reduce demand, especially for limited or exclusive releases.

Microeconomics: The branch of economics that studies individual decision-making, including how consumers and sellers interact in markets. It helps explain behaviors like price sensitivity, purchasing patterns, and value perception within niche markets like sneaker resale.

Substitution Effect: The tendency of consumers to switch to similar, cheaper alternatives when the price of a good increases, contributing to higher price elasticity.

Utility Maximization: The economic assumption that consumers make purchasing decisions to maximize satisfaction or “utility” given their income and preferences.

Mental Accounting: A behavioral economics concept describing how people mentally separate money into different "accounts" based on subjective criteria, affecting how they respond to prices and perceived value.

Reference Pricing: The internal standard or expected price consumers use to evaluate whether a given price seems reasonable or fair, heavily influencing perceived value and willingness to pay.

As far back as 135 years ago, economists were thinking about just how plastic prices could be. Alfred Marshall is credited with being the first to do so, introducing price elasticity in his book Principles of Economics.⁶ Specializing in microeconomics, Marshall’s book laid the groundwork for even more essential concepts like supply and demand and how they affect how prices are chosen. Known for describing them as "blades of scissors” that set the prices of goods at their intersection, Marshall is responsible for showing us how markets change as a result of supply or demand. In the history of economics prior to investigating behavioral influences, we look to Marshall for other colorful ways to explain otherwise difficult-to-grasp economic tenets. 

Marshall borrows the elasticity metaphor not from rubber bands as we have, but from physics instead. He argued that demand is “stretchable” or “snappable” relative to its pricing, similar to how matter can be warped by forces of physical nature.⁷ Despite the intuitive analogy for fellow economists and policymakers, it took until the following century for price elasticity to stick in microeconomic theories. The decisions people made for their purchases were contextualized by plasticity in its relationship to consumerism and markets, including in government policies like taxes or commodities like stocks.⁶

Over 50 years after Marshall’s idea, price elasticity was put to the test. Data collection methods allowed for consumer data to be accessible as empirical measurement rose from the 1950s to 1970s, allowing for economists to quantify behavioral patterns in sectors ranging from transportation to energy.^8,9 Price elasticity was no longer only a mathematical curve: it evolved into a tool to design policies and pricing strategies for the everyday consumer. Yet, the unexpected nature of consumer behavior loomed overhead, cluing in on unconscious, deeper psychological drivers behind the purchases made. Tensions between rational predictions of behavior versus real-world actions soon sprang up in the realm of elastic prices. 

Elasticity encountered great criticism when psychology came into play with behavioral economics: it turns out humans aren’t so rational after all, especially when it comes to how they spend their money. In what may sound glaringly obvious now, Kahneman and Tversky were some of the first to explain concepts like prospect theory, heuristics, and framing of choices as having a significant influence on purchasing behaviors.¹⁰ Around the same time, mental accounting similarly captured the subjective aspects of spending.¹¹ Together, these crucial developments in economics illustrated that price elasticity was not only about supply and demand, it was about biases and subjectivity—ranging from how we earn and value money to emotional factors like loss aversion. Just like behavior, predicting optimal prices wasn’t nearly as linear as traditional elasticity models had anticipated. 

Now, price elasticity has entered the digital era. Companies like Uber and Amazon use real-time behavioral data to adjust prices drastically depending on your habits, urgency, or even the time of day.¹² Pricing strategies aren’t individual data points anymore; they’re entire algorithms that make the line between economics and psychology all the more blurry, with subtle cues or dark patterns influencing our consumption. Elasticity, once viewed as a fixed economic concept, is more dynamic than ever: it's catered to each of us, predicts our patterns and cravings, and is shaped entirely by our own behaviors. Looking ahead, pricing won’t be only about economics—it will depend on how much we understand, and ethically design for, human demand. 

Alfred Marshall

The British economist who first introduced the concept of price elasticity in 1890, providing a mathematical framework to explain how demand responds to price changes and laying the foundation for modern microeconomics.

Richard Thaler

A behavioral economist whose theory of mental accounting challenged classical elasticity by showing that consumers treat money differently depending on its source or intended use, reshaping how we understand spending behavior.¹¹

Daniel Kahneman

A psychologist and Nobel laureate who, along with Amos Tversky, uncovered cognitive biases like loss aversion and reference dependence, offering insight into why real-world demand often defies rational price models.¹⁰

Understanding how prices go up or down in proportion to demand has key impacts in several industries and settings. We can look at pricing in the private sector, taxes in the public sector, and behavioral science itself in finding implicit drivers of demand.

Smarter pricing strategies for corporate growth

A typical application of price elasticity is in the private sector, where high-impact pricing decisions can occur with low resource investments, with the assistance of real-time data. In practice, these pricing models have designs that react to individual customer sensitivities.¹³ This can be as simple as offering discounts during times when demand is elastic, or keeping premium prices during times when demand is inelastic.² With our previous examples of a corporation like Uber, we can see how a company tailors prices to user behavior in the moment to optimize revenue and stay competitive. Just think of the last time you took an Uber, and then checked your Lyft app at the same time—only to go back to Uber to see your ride just went up by a significant amount. 

Such practical relevance of elasticity in this context connects three interrelated ideas: consumer responsiveness, pricing flexibility, and data-informed strategies for corporations. From a marketing angle, price elasticity segments customers at a deeper level than only demographics, digging further into behavioral patterns to show who will stick or not when prices fluctuate. A question we may often ask ourselves now is how much of our data is still private, in times where a price seems to change or a product itself appears scarily soon after conversing about it with a friend, demonstrating how precise price elasticity can be. 

Effective tax and price design for public good

Outside of the private sector, policymakers use plasticity as a tool for designing targeted interventions that influence behavior with an emphasis on social impact. This may be implemented through higher prices or taxes on highly elastic goods that are harmful, so that increases in price reduce consumption. Global institutions like the World Health Organization (WHO) are now doing this on products such as sugary and alcoholic drinks, or cigarettes, with the aim to increase prices on these goods by a minimum of 50% by 2035 as a means to lessen chronic diseases on a large scale while also creating revenue.¹⁴

While a similar component of consumer responsiveness is seen here, like the private sector, impacts on welfare and fiscal policy are also pronounced. Price elasticity isn’t just about big companies making money; it's about creating policies that recognize and understand how price interventions result in behavioral change instead of mere shifts in revenue. Organizations like the World Bank have demonstrated the effectiveness of this approach with products like tobacco and alcohol across cultures, while open questions remain with new products like vaping.¹⁵

Hidden motives from behavioral science

The lens of behavioral science zeroes in on elasticity as both a practical model and a theoretical framework to challenge conventional interpretations of price elasticity. This dual role makes it a powerful way to explain why consumers often behave unpredictably, driven more by irrational tendencies than by traditional economic logic. Behavioral science recognizes that people respond to a price not only by calculating its cost, instead taking into context how prices are framed, whether they feel fair or not, and how recently money was earned or saved.¹¹ Crucial principles like mental accounting and loss aversion disrupt theoretical assumptions of elasticity, revealing the psychological blueprints of demand.¹⁰

Elasticity of demand has a deeper relationship with behavioral science when investigating factors like emotional context or decision architecture. That is, how choices are presented to us impacts how we feel about and perceive prices. One way that this pricing psychology is integrated into products is framing prices in a “charming” way, where $99 is unconsciously interpreted as cheaper than $100 despite a minuscule $1 difference. For practitioners of behavioral science, this opens up opportunities for designing prices that are not only effective, but ethical and human-centered. 

Like any other economic theory, price elasticity has its issues. Some key limitations include how it assumes the rational consumer, varies depending on economic conditions, and may not pan out the same across different countries’ socioeconomic levels.

Irrational behavior and human emotions

Perhaps the biggest criticism, especially from the behavioral economics side, is the assumption that consumers always make logical choices rooted in price and utility. The reality we have come to accept is that behavior is shaped by cognitive biases, emotions, and context, which are only some of the possible ingredients that lend themselves to irrationality.¹⁰ An intuitive, simple way of thinking about this is a time when the price simply felt unfair: perhaps it was your coffee that ended up being $7. A rejection here isn’t necessarily because $7 feels unaffordable in general—but because this cappuccino doesn’t seem worth it. Compare that to happily spending $7 on a craft cocktail later that evening during late-night happy hour, where the atmosphere, presentation, and social context might make the price feel justified. Our willingness to pay isn’t always logical; it shifts with expectations and how we frame value in the moment.

One way to capture this idea is bounded rationality: our brains aren’t rational, robotic computers. Instead, they are flawed, emotional, and erroneous—qualities that make us human. This is true of our decisions in general, and in the subset of decisions that contribute to elastic prices. The contemporary decision science of customer emotions is full of irrationality, yet also full of opportunities for emotional connection. With over 300 emotional motivators behind our purchasing behaviors, it’s no wonder that not all of our purchasing decisions are rational, let alone able to be described by one-word emotional states.¹⁶ Whether you’re motivated to “stand out from the crowd” or simply “enjoy a sense of well-being,” your emotions matter with price elasticity more than you may feel. 

Simplifying complex purchasing decisions

Brand loyalty, product bundles, and cultural values are only a few elements that elasticity typically ignores when isolating the relationship between price and quantity. How we behave depending on how elastic a price is becomes far more complex than the original mathematical calculation it entails. Markets where purchases are life-or-death, such as in healthcare, or socially influenced, like in fashion, are just two contexts that illustrate this complexity. A doctor is unlikely to be thinking of price elasticity when purchasing life-saving operating equipment, just like how a fashion designer may not be rational in spending thousands on their first runway show. 

One way to tell this story is through the journey of the consumer and their decisions, especially in marketing when companies want to reach their customers in key moments of influence.¹⁷ Elasticity doesn’t comprehend the complex impact of emotion on a product purchase—where price hikes on necessities are tolerable, yet identity-driven purchases cause strong reactions even with the smallest of price changes.¹⁸ All in all, decisions are intricate in their social molding, where peer influence or brand perception alone can override steep prices, leading to elastic predictions falling short. 

Elasticity is culturally and socioeconomically bound

Other issues arise from the cross-cultural differences of price elasticity, or whether such a concept is relevant at all in a given cultural context. If we return to the example of higher prices or taxes on a good like a sugary drink for harm reduction, similar thinking can be applied to healthy food consumption, too. High-income countries may place tax exemptions on healthy foods as an incentive, but lower income countries don’t share such a luxury, where only essential foods are subsidized for the sake of food security.¹⁹ While these are cultural and socioeconomic differences, a combination of taxes and subsidies on foods like fruits and vegetables could reduce deaths from diseases like cancer—yet they remain challenging to implement.

These examples highlight that price elasticity isn’t a universal constant: it’s shaped by cultural norms, social priorities, and economic realities. As Nghiem et al. highlight, these price elasticities are relevant to epidemiology and public health outcomes, but it is challenging to find consistency across the board. This shows how we can’t limit elasticity estimates solely to economic models, as local contexts must be considered for effective and equitable interventions.  

Price elasticity in energy consumption across time and technology 

Energy use isn’t just a matter of supply and demand: it’s a larger reflection of the systems, structures, and timeframes within which people make decisions. Since the oil shocks of the 1970s, economists and policymakers have turned to one concept in particular to help make sense of how energy demand shifts: price elasticity.²⁰ In its simplest form, price elasticity refers to how sensitive energy demand is to changes in price, whether the source is a windmill or a hydro dam. Yet crucially, early work from the World Bank revealed this concept is anything but simple in practice.

A 1981 report by Boum Jong Choe offered one of the earliest comprehensive overviews of energy demand elasticity.²¹ The report emphasized that elasticity estimates are highly sensitive to timeframe, fuel type, and sector. For example, short-run energy adjustments might involve only small shifts, like turning down thermostats or reducing vehicle use, whereas long-term changes require deeper structural shifts, like upgrading home insulation or replacing factory equipment. In industrialized countries, the report noted, long-run price elasticity estimates for total energy demand ranged widely from -0.1 to -0.7. In contrast, developing countries showed even greater variation, with price elasticities around -0.3 and income elasticities above 1.2, reflecting rapid industrialization and infrastructure expansion. A takeaway here is that not only does context matter with the price elasticity of energy, but also the time at which energy is consumed.

Fast forward to 2017, and researchers Labandeira, Labeaga, and López-Otero revisited this issue with a broader and more statistically rigorous approach.²⁰ Their meta-analysis reviewed hundreds of elasticity estimates from recent decades across electricity, gasoline, natural gas, diesel, and heating oil. The findings confirmed a consistent pattern: energy demand is generally price inelastic, meaning price changes don’t always lead to proportionate shifts in behavior. In both the short and long term, consumers and producers often absorb price changes rather than immediately reducing consumption. At the same time, the study also pointed out that elasticity varies significantly by energy type and use context—natural gas and gasoline, for example, showed higher responsiveness compared to electricity.

Together, these studies show that price elasticity in energy consumption is not a fixed value; rather, it’s shaped by evolving technology, policy frameworks, and behavioral habits. From early econometric models in the 1980s to modern meta-analyses in the 21st century, the field has steadily moved toward more nuanced, segmented understandings of how people and institutions respond to energy costs. In a world increasingly shaped by climate imperatives, this research reminds us that changing prices alone may not be enough to drive sustainable energy use—unless paired with structural supports that make change easier in the long run.

The behavioral economics behind sneaker resale culture

The sneaker resale market has surged in recent years from a niche subculture to a global phenomenon, driven by factors beyond mere fashion preference. Researcher Zhang BoPing tells the narrative as an analysis that follows how scarcity, storytelling, and community hype have transformed sneakers into coveted luxury items with fluctuating prices, much like financial assets.²² Resellers often purchase limited releases immediately and manipulate availability to drive resale prices, using sneaker-selling platforms like StockX and Goat to track and predict market trends.

Central to this market’s dynamics is the concept of price elasticity of demand. Sneakers in the resale market tend to show inelastic demand, especially for rare or limited-edition models. Despite rising prices, many buyers remain willing to pay premiums because scarcity enhances perceived value and exclusivity, while strong social signaling drives demand. This contrasts with typical consumer goods, where price increases usually lead to lower demand.

KPMG’s research on luxury goods pricing supports this view: scarcity combined with brand prestige reduces price sensitivity, allowing brands and resellers to command significant markups without losing customers.²³ Other researchers further emphasize that resale markets reflect shifting consumer identities, where uniqueness and symbolic ownership outweigh conventional price considerations.²⁴ These types of arguments, even in the niche market of sneakers, demonstrate how convoluted price elasticity may become. 

Unlike markets driven purely by speculative bubbles, the sneaker resale market is characterized by nuanced price elasticity, where demand remains relatively inelastic due to factors like scarcity, brand loyalty, and cultural value. Consumers balance the desire for exclusivity with wearability, and regulatory or social pressures prevent unchecked price inflation, contributing to market stability and signaling a durable, resilient market. This blend of economic forces and cultural dynamics suggests that the sneaker resale market isn’t just a passing trend—it’s evolving into a sustainable ecosystem where price elasticity reflects more than just numbers, but also the deeper meanings buyers attach to these coveted products.

Does emotion affect our ability to make rational decisions?

We might like to think we’re purely analytical, but emotions do play a role in our decisions. In this piece, TDL columnist Tiantian Li breaks down the basic economics and neuroscience of our emotions when making decisions relative to our ability to be rational.

Mental accounting influences how we spend our time

As we look at mental accounting in how we subjectively value money, the same can be said about time. In this article, TDL columnist Sanketh Andhavarapu outlines the harms, benefits, and relevance of mental accounting to time compared to its usual application of money.

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