Definition of Elastic Demand
Elastic demand is the situation in which demand for a product or service is sensitive to price changes.
Elastic demand is a major concern for a manufacturer that attempts to set a product’s price based on the product’s costs. For instance, if the manufacturer’s production and sales have declined and it fails to cut fixed costs, the manufacturer could be worse off by increasing selling prices. It could even lead to a death spiral.
Examples of Elastic Demand
If the selling price of a product is increased, the number of units sold will decrease. If the selling price of a product is decreased, the number of units sold will increase. Elastic demand is also referred to as the price elasticity of demand.
[Inelastic demand means that the demand for a product is not sensitive to price changes.]
