Elasticity in Depth
How sensitive buyers are to price and income, and why it matters for companies and investors: the revenue rule, real estimates for food and gasoline, the short run and the long run, income and cross-price elasticity, who really pays a tax or tariff, and the link between elasticity and profit margins.
The short version
Elasticity measures how much buyers respond to a change in price or income. When demand is inelastic, a price rise brings in more revenue; when it's elastic, less. Most foods are inelastic, from eggs at 0.27 to restaurant meals at 0.81, and short-run gasoline demand barely responds at all, though people adjust more over time. Income elasticity separates necessities from luxuries: the highest-income households earn 13 times as much as the lowest but spend about 3 times as much on food. Elasticity also decides who bears a tax: the less elastic side pays more. And the less elastic the demand a single firm faces, the higher the margin it can charge.
By the end of this lesson, you'll be able to
- Use price elasticity to predict how revenue responds to a price change, and explain why elasticity grows over time
- Explain income and cross-price elasticity and what they say about necessities, luxuries, substitutes, and complements
- Show how elasticity decides who bears a tax or tariff and how it limits a firm's margin
Why this matters
Supply and Demand introduced Price elasticity of demand. How strongly the quantity people buy responds to a change in price: the percentage change in quantity divided by the percentage change in price. Glossary: how much the quantity bought changes when the price changes. It's one of the most useful numbers in economics for an investor. It decides whether a price increase helps or hurts a company's revenue, how a business fares when incomes fall, who ends up paying a new tax or tariff, and how high a company's margins can go. This lesson takes each in turn.
The revenue rule
Price elasticity = Percentage change in quantity ÷ Percentage change in price
Elasticity is usually negative, since a higher price means fewer sales, so it's often quoted as a positive number for convenience. What matters is whether its size is above or below 1.
| Elasticity | Change in quantity | Change in revenue | Demand is |
|---|---|---|---|
| −0.3 | −3% | 1.10 × 0.97 − 1 = +6.7% | Inelastic |
| −1.0 | −10% | 1.10 × 0.90 − 1 = −1.0% | Unit elastic |
| −2.0 | −20% | 1.10 × 0.80 − 1 = −12.0% | Elastic |
When demand is inelastic, a price rise brings in more revenue; when it's elastic, less. At an elasticity of −1 revenue barely moves, and for very small price changes it doesn't move at all. The −1% here is an effect of the 10% step.
What real estimates look like
A review of 160 US studies estimated the price elasticity of demand for the main food categories. Every average was below 1 in size, so food demand is inelastic, but the range is wide.1
| Category | Elasticity | Category | Elasticity |
|---|---|---|---|
| Food away from home | 0.81 | Cereals | 0.60 |
| Soft drinks | 0.79 | Vegetables | 0.58 |
| Beef | 0.75 | Cheese | 0.44 |
| Fruit | 0.70 | Sweets and sugars | 0.34 |
| Poultry | 0.68 | Eggs | 0.27 |
Andreyeva, Long, and Brownell, 2010.1 Restaurant meals respond most, plausibly because cooking at home is an easy substitute. Eggs respond least, which helps explain the egg price spikes described in Supply and Demand.
The short run and the long run
Gasoline shows how small short-run elasticity can be. A study comparing two periods of high prices estimated the short-run price elasticity of US gasoline demand at −0.21 to −0.34 from 1975 to 1980, and only −0.034 to −0.077 from 2001 to 2006.2 At −0.05, a 20% rise in the price cuts the quantity bought by about 1%: in the short run people still have to drive the cars they own to the jobs they have.
Given time, they adjust. They buy more efficient cars, move, change commutes, and businesses change how they ship. A review of the gasoline research prepared for the Energy Information Administration lists consumers being more elastic in the long term among its main findings.3 The general principle is that buyers respond more when they've had more time to find substitutes. A price increase that looks painless in the first year can cost volume later.
The rest of this lesson is for members
Still to come in this lesson: Income elasticity, Cross-price elasticity, Who really pays a tax, Elasticity and margins, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Supply and DemandEconomics for Investors (depth track)
- Pricing PowerEconomics for Investors (depth track)
- Trade, Tariffs, and CurrenciesEconomics for Investors (depth track)
- Competition and Market StructureEconomics for Investors (depth track)
Notes and sources
- American Journal of Public Health, via PubMed Central. Tatiana Andreyeva, Michael W. Long, and Kelly D. Brownell, The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food, American Journal of Public Health 100(2) (February 2010). Checked 2026-10-14. Back to text
- National Bureau of Economic Research. Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling, Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand, Working Paper 12530 (2006). Checked 2026-10-14. Back to text
- U.S. Energy Information Administration. U.S. Gasoline Consumption Short-Term Forecast: literature review prepared for EIA (September 2017). Checked 2026-10-14. Back to text
- USDA Economic Research Service. Victoria Davidenko and Megan Sweitzer, U.S. households that earn less spend a higher share of income on food, Charts of Note (November 19, 2024). Checked 2026-10-14.
- Mary Amiti, Stephen J. Redding, and David E. Weinstein, NBER Working Paper 25672. The Impact of the 2018 Trade War on U.S. Prices and Welfare (March 2019). Checked 2026-10-14.