The term “elastic” in finance refers to a situation where the demand or supply for a good or service is sensitive to changes in price. In other words, a small change in price leads to a significant change in the quantity demanded or supplied. The more elastic a product, the more consumers or producers are likely to alter their behavior based on price changes.
The phonetic spelling of the word “Elastic” is /ɪˈlæstɪk/.
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The term “elastic” in business/finance is important because it describes the level of sensitivity or responsiveness of consumers’ demand or suppliers’ supply to changes in price or income. It allows businesses to understand how changes in price or income will affect their sales and revenues. This further facilitates strategic planning, as firms can predict consumer behavior and adjust their prices strategically to benefit their profits. For instance, if a product is “elastic,” a price rise may significantly reduce demand, resulting in lower total revenue. This awareness helps firms avoid producing too much or too little, ensuring cost-effectiveness and sustainability. Understanding elasticity also assists policymakers in assessing the impact of taxation and subsidies on the market.
Elasticity, in the realm of economics and finance, is a measure of a variable’s responsiveness to a change in another variable. It is fundamentally important for making business decisions because it helps businesses understand how demand and supply of their product or service will react to changes in price and other market factors. If a product is termed as ‘elastic’ , it means that demand or supply for it is sensitive to changes in price, i.e., a small change in price could lead to a significant change in the quantity demanded or supplied. For instance, a business may utilize the concept of elasticity to forecast how a proposed price increase would impact sales volumes and eventually, total revenue. With price elasticity of demand, they could anticipate whether their revenue would increase or decline, thereby assisting in strategising profitable decisions. Similarly, elasticity is beneficial in policy formulation too, as governments may want to understand the potential fiscal impact of taxes on goods and services, with knowledge on how much the tax may alter consumption behaviours. In summary, elasticity provides a quantitative tool to predict behaviours, facilitating more informed financial and business decisions.
1. Gasoline: This is an example of inelastic demand because regardless of price changes, the demand for gasoline seems to remain steady in the short term. People need to drive their vehicles and thus need gasoline. However, in the long term, if prices were to remain high, consumers might become more willing to use public transportation, carpool, or invest in fuel-efficient vehicles. 2. Luxury Goods: High-end designer clothing or luxury cars are examples of elastic goods. Their demand tends to be highly sensitive to changes in price. For instance, if the price for a luxury brand t-shirt increases significantly, consumers may opt for less expensive brands, leading to a decrease in demand for the luxury product. 3. Fast Food: Fast food is another item often considered elastic because there are numerous alternatives available if prices rise. If a popular fast food restaurant decides to raise its prices, consumers may choose to eat at a competing fast food chain or cook at home instead. Consequently, a small percentage change in price could cause a bigger percentage change in quantity demanded.
Frequently Asked Questions(FAQ)
What does the term elastic refer to in finance and business?
What factors affect the elasticity of a product or service?
How is elasticity measured in finance?
What does it mean if a product is said to be elastic or highly elastic?
What do we call a product when its demand or supply is not sensitive to price changes?
How does understanding elasticity benefit businesses?
What is Income Elasticity?
What is Cross-Price Elasticity?
Related Finance Terms
- Price Elasticity of Demand
- Income Elasticity
- Cross Elasticity of Demand
- Elastic Supply
- Unitary Elastic
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