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Examples of elasticity
4 May 2019 by Tejvan Pettinger

Price elasticity of demand measures the responsiveness of demand to a change in price.

Price inelastic – a change in price causes a smaller % change in demand.

Price elastic – a change in price causes a bigger % change in demand.

Price inelastic demand

We say a good is price inelastic, when an increase in price causes a smaller % fall in
demand, e.g. if price of petrol rises 40%, but demand for petrol only falls 10% the PED
= – 0.25

Examples of price inelastic demand

Petrol – petrol has few alternatives because people with a car need to buy
petrol. For many driving is a necessity. There are weak substitutes, such as train,
walking and the bus. But, generally, if the price of petrol goes up, demand proves
very inelastic.
Salt. If the price of salt increased, demand would largely be unchanged. It is only
a small % of income and people tend to buy infrequently. It is a good with no real
substitutes at all.
A good produced by a monopoly. Any good produced by a monopoly is
likely to be inelastic demand. For example, if Sky increases the cost of
premiership pay per view, many football fans will pay the extra price. Though
because it isn’t a necessity, demand may be less inelastic than say petrol.
Tap water. For householders, tap water is a necessity with no alternatives. If
the water company increase the cost of water bills, people would keep buying the
service. It would have to rise to a very high price before people disconnected
their water supply. This is why tap water is regulated by the government.
Diamonds. Bought very infrequently, diamonds are the ultimate luxury with
few exact alternatives. You could buy other precious gems, but others may not
have the same allure as diamonds. A cut in price wouldn’t increase demand very
much.
Peak rail tickets. For commuters who rely on the train to get to work in
London, demand will be very inelastic. If the price of fares from Surbiton to
London increase, demand will only fall by a small amount. The alternatives for
commuting into London, such as driving are limited.
Cigarettes. If cigarette tax increases and the price of all tobacco increases,

demand will be inelastic because many smokers are addicted and don’t have any
alternatives to keep buying.
Apple iPhones, iPads. The Apple brand is so strong that many consumers will
pay a premium for Apple products. If the price rises for Apple iPhone, many will
continue to buy. If it was a less well-known brand like Dell computers, you would
expect demand to be price elastic.

Examples of price elastic demand

We say a good is price elastic when an increase in prices causes a bigger % fall in
demand. e.g. if price rises 20% and demand falls 50%, the PED = -2.5
Examples include:

Heinz soup. These days there are many alternatives to Heinz soup. If the price
rises, people will switch to less expensive varieties.
Shell petrol. We say that petrol is overall inelastic. But, if an individual petrol

station increases the price, people will buy from other petrol stations. The only
exception is if a petrol station has a local monopoly – e.g. at the service station
on the motorway, there is a captive audience. But, in a city centre with many
alternatives, people will have an elastic demand.
Tesco bread. Tesco bread will be highly price elastic because there are many
better alternatives. If the price of Tesco bread rises, consumers will switch to
alternatives, such as Kingsmill.
Daily Express. If the Daily Express increases in price, there are similar
newspapers people will switch to. For example, the Daily Mail or Daily Mirror. If
it was a newspaper like the Financial Times of the Economist, demand would be
more inelastic, as there is no close substitute to the Financial Times.
Kit Kat chocolate bar. If Kit Kats increase, people will switch to alternative
types of a chocolate bar.
 Porsche sports car. If a Porsche increases in price, demand will probably be
elastic because it is a high % of income, and so the higher price will put people
off. Also, there are other alternatives, such as Jaguar or Aston Martin. However,
this is a little less clear cut. Some car enthusiasts may want to buy a Porsche
whatever the price.

Income elasticity of demand

Income elasticity of demand measures how demand responds to a change in income.

If income goes up 10%, and you spend 20% more on foreign holidays. The YED =
2.0 (luxury goods)
If income goes up 10%, and you spend 5% less on Tesco value baked beans. The
YED = -0.5 (inferior good)

Examples of income elastic (luxury goods)

Income elastic – means a change in income causes a bigger % change in demand, e.g.

Porsche sports car. As income increases, people can spend a higher % of their
income on the car
 Organic bread. If income increases people may switch to the ‘luxury’ option of
organic bread.
Homemade soup. If income increases, people will buy the more expensive
fresh soup, rather than cheaper tins, which aren’t as nice.
‘Premium unleaded’ more expensive petrol, which is supposed to be better
for your engine. Most people stick with the cheapest.

Examples of income inelastic goods

Fruit. If incomes increase, people may buy more bananas, but many already eat
as much as they want. But, those on lower incomes may feel they can now afford
to buy fresh bananas.

Examples of Inferior Goods

An inferior good has a negative income elasticity of demand. When incomes increase,
demand falls.

Tesco value baked beans. If your income increases, you stop buying Tesco value
beans and switch to Heinz, which are better quality.
Instant coffee. Instant coffee is cheap, if income goes up, you may buy takeaway
or switch to filter coffee.
Milk powder. A cheap way to drink milk.

Elasticity of supply

The elasticity of supply measures the responsiveness of supply to a change in price

Inelastic supply
Inelastic supply means an increase in price causes a smaller % change in supply. It
means firms have difficulty increasing supply in response to a rise in price.

Potatoes in the short term. If the price of potatoes goes up, farmers cannot
increase supply because it depends on how many seeds they put in the ground in
March.
Nuclear Power. It would take considerable time to increase the supply of

nuclear power because you need skilled labour, and it would take a long time to
build.

Elastic supply

Elastic supply means an increase in price causes a bigger % change in supply. It means
firms can easily increase supply in response to a change in price.

Firms operating below full capacity. If a car factory is operating at 70%

capacity, then it can easily increase supply and produce more cars in response to
changes in price.

Related
 Different types of goods – normal, luxury and inferior
Income elasticity of demand
Examples of elasticity of demand for food.

 A-Level, economics
 elasticity
 Reasons for persistent US Current Account Deficit
 What is the paradox of deleveraging?

22 thoughts on “Examples of elasticity”

← Older Comments

Sadeem
1 November 2019 at 3:10 pm

Thank you so much!! This was so helpful and explained very well!


Chukwunedum praise
16 February 2020 at 7:38 pm

This is very interesting and helpful. It will nice if there is an online class or
group class base on this economics.

Prajwal Neupane
25 May 2020 at 4:42 pm
 Help me to compare which one is elastic and inelastic with reason?
-Selling tractors during an economic meltdown when there is excess capacity vs
when the economy is in the middle of a boom period and all capacity has been
exhausted.

Maya
30 September 2020 at 7:24 pm

Explain how the incidence of an indirect tax depends on the price elasticity of
demand and the price elasticity of supply. [10 marks]

MUHAMMAD IRFAN
6 February 2021 at 2:20 pm

VERY HELPFUL


Jason
26 February 2021 at 3:00 am

thanks for the help!!!!

Desmond Dashe
6 April 2021 at 7:24 pm
 Very very interesting, you are helping the future Economists, Keep it up

← Older Comments

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Tejvan Pettinger studied PPE at LMH, Oxford University. Find out more

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