Elastic and inelastic goods differ in how much their demand changes when prices change. With elastic goods, a small price increase causes a large drop in quantity demanded, while a price decrease stimulates significant demand growth. Consumers are price-sensitive for these products because suitable alternatives exist or the purchase isn't essential. Common examples include luxury items, entertainment, and branded products—if coffee prices rise, people might switch to tea or drink less coffee.
Inelastic goods are the opposite: demand stays relatively stable regardless of price changes. People buy roughly the same quantity even if prices fluctuate significantly. These are typically necessities with few substitutes, like insulin for diabetics, gasoline for commuters, or electricity for households. Consumers need these products regardless of cost, so price changes don't dramatically alter purchasing behavior.
Economists measure elasticity using the price elasticity coefficient. If a 10% price increase causes demand to drop by more than 10%, the good is elastic. If demand drops by less than 10%, it's inelastic. Understanding this distinction matters for businesses setting prices and governments designing tax policy—raising taxes on inelastic goods like cigarettes generates more revenue because consumption doesn't drop much, while taxes on elastic goods may reduce both quantity sold and total revenue.