How flexible are you about the items you buy? Are there some purchases that you consider special, without substitute — and that you’re willing to make regardless of price? And other purchases that you’re willing to go without or swap for others when prices go up? Economists call this phenomenon elasticity of demand. It’s the relationship between the demand for a product and some other factor, most often price. Understanding this relationship and how it affects buying behavior can help a business make smarter marketing decisions that increase sales.
What Is Elasticity of Demand?
Elasticity of demand refers to the shift in demand for an item or service when a change occurs in one of the variables that buyers consider as part of their purchase decisions. It’s a relationship between demand and another variable, such as price, availability of substitutes, advertising pressure and customer income.
When a change in any one of those variables causes a significant alteration in demand for a product or service, its elasticity of demand is considered high. Thought of another way, elasticity shows that a customer’s buying behavior is highly flexible, or stretchy — like an elastic waistband. The more willing customers are to change purchasing decisions, the more elastic a product or service is. If a customer is willing to buy a different brand of coffee simply because it’s on sale that week or completely forgo buying coffee because its price has gone up, coffee can be said to have elastic demand.
By contrast, products that are inelastic do not experience large shifts in demand due to changes in their purchase-consideration variables. Customers remain rigid or firm in their buying choices for certain products and are unwilling or unable to be flexible. Tobacco products and utilities are classic examples of inelasticity of demand because, most times, a change in price or increase in advertising won’t significantly influence consumer demand.
Key Takeaways
- Elasticity of demand describes the potential for variation in demand for a product or service arising from changes in price, customer income, advertising and other related factors.
- Many factors influence elasticity, such as price, availability of substitutes, necessity, brand loyalty and urgency.
- Understanding elasticity of demand can help guide a business’s marketing and selling strategies to maximize profitability.
- Executing tactics to influence demand requires keen market insight and robust data for analysis.
Elasticity of Demand Explained
Elastic demand equates to flexibility in purchasing decisions — whether in quantities purchased, the chosen brand or product substitution. Inelastic demand is unwavering, up to a point. For this reason, reducing elasticity is often considered to be a marketer’s primary goal: to position a product as so essential that customers will continue to buy in most circumstances. Imagine a business that can increase its product price without a significant falloff in demand. Or one with customers so loyal they continue to purchase in the same quantity even when their own income drops. Understanding elasticity helps move the needle toward inelasticity.
Certain industries are said to be recession-resistant, largely because their products are inelastic: Demand for those products remains constant despite any economic downturn. Health care, utilities and certain “vices” like alcohol and tobacco are items that tend to have consistent demand, regardless of price or the customer’s income. They also tend to generate high brand loyalty or barriers to switching, adding to customers’ unwillingness (or inability) to swap brands, as with doctors and utilities.