Price Elasticity

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.