Elasticity in Three Practical Examples

Why Do Some Prices Affect Us More Than Others?

In our daily lives, we constantly experience how certain price changes affect us differently. Gasoline remains an inevitable expense even as its price increases because it depends on our daily transportation needs. However, when the price of a luxury item skyrockets, many of us simply decide to forgo it or look for more affordable alternatives. This distinction is precisely what economists call elasticity: the way we respond to price variations.

Elasticity measures how sensitive the demand for a product is to changes in its value. Some goods generate significant changes in the quantity demanded when their prices fluctuate, while others maintain their demand relatively constant, regardless of how much the price varies.

Three Examples of Elasticity that Affect Our Decisions

First Example: Gasoline as an Inelastic Product

Gasoline perfectly illustrates what inelasticity means. When the price of fuel increases by 20%, most drivers do not reduce their consumption by the same proportion. Why? Because transportation is a fundamental necessity, not an optional luxury. People need to go to work, take their children to school, and carry out their daily activities. This characteristic causes demand to remain relatively insensitive to price movements, with an elasticity coefficient of less than 1.0.

Second Example: Luxury Products as Elastic Goods

Unlike gasoline, luxury goods respond dramatically to price changes. If the value of a branded watch rises significantly, potential buyers may easily opt for more affordable alternatives or simply refrain from making the purchase. In this case, demand is highly sensitive to price variations, showing an elasticity coefficient greater than 1.0. Consumers have many substitution options available.

Third Example: Unit Elasticity in Intermediate Services

There is a third category where the percentage change in price causes an exactly proportional change in the quantity demanded, resulting in an elasticity equal to 1.0. Some telecommunications services or digital subscriptions may fall into this category, where small price adjustments generate equivalent responses in demand.

Application in Trading and Financial Markets

For traders, understanding elasticity is fundamental. When they identify products or assets with elastic demand, they can take advantage of short-term price fluctuations through momentum strategies. These sharp price movements create arbitrage opportunities that experienced traders can capitalize on.

On the other hand, when supply is inelastic —when there is a scarcity of an asset and the available quantity cannot increase quickly— this signals an opportunity to accumulate positions for the medium and long term. Elasticity analysis allows traders to make more informed decisions about when to enter and when to exit the market.

Elasticity Beyond Economics

The concept transcends financial markets. In engineering and construction, the elasticity of materials determines how structures respond to pressure and tension, ensuring safety. In medicine, understanding the elasticity of the skin is crucial for developing effective dermatological treatments. In ecology, the elasticity of ecosystems allows predicting their ability to recover from climate changes or habitat alterations.

Conclusion: A Fundamental Concept for Decision Making

Elasticity is much more than an economic formula: it is a mental tool for understanding how we react to changes. Whether choosing to buy more expensive gasoline, foregoing a luxury item, or executing a trading strategy, elasticity helps us make rational and effective decisions based on how different variables interact with one another.