Office Hours: Elasticity of Demand

When the price goes up, what happens to the quantity demanded? It goes down. And vice-versa. This is known as the law of demand. Pretty straightforward.

What this law doesn’t cover is how much the quantity demanded goes up or down as prices change. This is where the concept of elasticity of demand comes in.

If an increase in the price of a good or service decreases quantity demanded by a lot, we call that demand curve “elastic.” It stretches quite a bit -- like a rubberband. The same rule applies to price decreases here. The cheaper it gets, the more people will demand it.

On the other hand, if an increase or decrease in the price of a good or service hardly affects quantity demanded, that demand curve is inelastic.

Those are the basics of elasticity of demand. In this Office Hours video, we’ll put these concepts into practice with some real-world examples. You’ll also learn a nifty trick for quickly distinguishing the elasticity of a demand curve on a graph.