Question

Can someone explain to me about elastic and inelastic demand?

Answer 1

Well first, what is elasticity?

Elasticity is just reactive a good is when the price changes.

So if you change the price a little and theres a big shift in demand, then it is very ELASTIC because it's really sensitive

Conversely, if you change the price a lot but the demand doesn't change that much, then it is very INELASTIC or stiff and unbendable.

So Elastic Demand just means the demand for a particular good is very sensitive to price changes. For example:

If you raise the price of Soda by .10 cents, then everyone will start buying Ice Tea, because they pretty much serve the same purpose and both are very tasty. If you lower the price by .10 cents, then everyone will be drinking Soda because its cheaper than Ice Tea.

So we say Soda has ELASTIC DEMAND. This is because Soda and Ice Tea are substitutes. Usually goods with many substitutes are have very Elastic demand.

Now lets look at something else, like a Tomahawk Missile. Now if Lockheed Martin decides to raise the price of a Tomahawk Missile by 1,000 dollars, the United States government won't really change the amount they buy. I mean they might buy a few less, but the overall amount has very little change. This is because when you go to war, you need Tomahawk Missiles to blow up tanks and ships and planes. You can't really use something other than Missile. So the Tomahawk Missile doesn't have many substitutes.

So we say the Tomahawk Missile has very INELASTIC DEMAND. Usually things with very few substitutes have inelastic demand.