If demand is said to be elastic, it means that the quantity demanded of a good or service is highly responsive to changes in its price. Specifically, when the price of the good increases or decreases, the percentage change in quantity demanded is greater than the percentage change in price.
In economic terms, this is typically represented by a price elasticity of demand (PED) greater than 1 (in absolute value). For example, if a 10% increase in price leads to a 20% decrease in the quantity demanded, the elasticity would be:
\[ \text{Price Elasticity of Demand (PED)} = \frac{% \text{ change in quantity demanded}}{% \text{ change in price}} = \frac{-20%}{10%} = -2 \]
This value (-2) indicates that demand is elastic because its absolute value is greater than 1.
Characteristics of elastic demand include:
- Availability of Substitutes: If there are many substitutes available, consumers can easily switch to another product if the price rises.
- Luxury vs. Necessity: Luxuries generally have more elastic demand, while necessities tend to have more inelastic demand.
- Proportion of Income: Goods that take up a larger portion of a consumer's income tend to have more elastic demand because price changes have a larger effect on the overall budget.
- Time Frame: Demand elasticity can vary over time. In the short term, demand for some goods may be less elastic, while over a longer period, it could become more elastic as consumers find alternatives or adjust their consumption habits.
In summary, elastic demand indicates a situation where consumers are quite sensitive to price changes, leading to significant changes in the quantity demanded.