# Elastic

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## Definition of 'Elastic'

Elasticity is a measure of how responsive one variable is to changes in another. In finance, elasticity is often used to measure the relationship between the price of a security and its volume.

Price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price. A good or service with a high price elasticity of demand is one whose quantity demanded changes significantly in response to a small change in price. For example, if the price of gasoline increases by 10%, the quantity demanded of gasoline may decrease by 20%. This would indicate that gasoline has a high price elasticity of demand.

In contrast, a good or service with a low price elasticity of demand is one whose quantity demanded changes little in response to a large change in price. For example, if the price of salt increases by 10%, the quantity demanded of salt may only decrease by 1%. This would indicate that salt has a low price elasticity of demand.

The price elasticity of demand is important for businesses to understand because it can help them to determine how changes in price will affect their sales. For example, a business that sells a product with a high price elasticity of demand may be able to increase its profits by raising its prices. However, a business that sells a product with a low price elasticity of demand may find that raising its prices will actually lead to a decrease in sales and profits.

Income elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in income. A good or service with a high income elasticity of demand is one whose quantity demanded increases significantly in response to a small increase in income. For example, if a person's income increases by 10%, the quantity of food they demand may increase by 20%. This would indicate that food has a high income elasticity of demand.

In contrast, a good or service with a low income elasticity of demand is one whose quantity demanded changes little in response to a large change in income. For example, if a person's income increases by 10%, the quantity of clothing they demand may only increase by 1%. This would indicate that clothing has a low income elasticity of demand.

The income elasticity of demand is important for businesses to understand because it can help them to determine how changes in income will affect their sales. For example, a business that sells a product with a high income elasticity of demand may be able to increase its profits by targeting consumers with high incomes. However, a business that sells a product with a low income elasticity of demand may find that it is unable to increase its sales even if it targets consumers with high incomes.

Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good or service to changes in the price of another good or service. A good or service with a high cross-price elasticity of demand is one whose quantity demanded changes significantly in response to a small change in the price of another good or service. For example, if the price of coffee increases by 10%, the quantity of tea demanded may increase by 20%. This would indicate that coffee and tea have a high cross-price elasticity of demand.

In contrast, a good or service with a low cross-price elasticity of demand is one whose quantity demanded changes little in response to a large change in the price of another good or service. For example, if the price of gasoline increases by 10%, the quantity of milk demanded may only increase by 1%. This would indicate that gasoline and milk have a low cross-price elasticity of demand.

The cross-price elasticity of demand is important for businesses to understand because it can help them to determine how changes in the prices of other goods or services will affect their sales. For example, a business that sells a product with a high cross-price elasticity of demand may be able to increase its sales by lowering the price of another product that is closely related. However, a business that sells a product with a low cross-price elasticity of demand may find that it is unable to increase its sales even if it lowers the price of another product.

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