Elasticity measures whether demand moves when prices change
Price elasticity is the percentage change in quantity demanded divided by the percentage change in price. If raising price 10% drops demand 5%, elasticity is 0.5 (inelastic). If raising price 10% drops demand 15%, elasticity is 1.5 (elastic). The elastic/inelastic threshold is 1: if elasticity exceeds 1, price increases reduce revenue because volume falls faster than price rises. A power company raising rates 5% in an elastic market (where customers can switch or reduce usage) might lose 10% of volume, reducing total revenue. The same utility in an inelastic market (where customers have no alternative) gains revenue from the rate increase. Insulin, utilities, addictive goods, and medical procedures tend toward inelastic. Luxury goods, restaurant meals, and discretionary services tend toward elastic.
Why elasticity changes over time
A market can shift from inelastic to elastic as substitutes emerge or consumers adapt. Gasoline was inelastic in 2000 (few alternatives), more elastic by 2023 (electric vehicles, remote work). Raising prices also reveals true elasticity: the willingness to pay that seemed strong at one price collapses when you test higher prices. Conversely, lowering prices in an elastic market can increase revenue, but requires confidence that volume gains are real, not just accounting for category growth or cyclical demand shifts.