Elasticity: Why Rent Hits Harder Than Coffee

Why people ignore some price increases and revolt over others.

5 min readInteractiveQuick check inside

The big idea

Price elasticity measures how strongly people react to a price change. If buyers react a lot, demand is elastic. If they barely react, it’s inelastic.

If your coffee goes up 50 cents, you might shrug. If your rent goes up 10%, you start looking at apartments. Price elasticity of demand puts a number on that reaction: the % change in quantity divided by the % change in price.

If the answer is bigger than 1, demand is elastic, meaning people react strongly. If it’s less than 1, demand is inelastic, meaning they keep buying anyway. Demand tends to be more elastic when there are easy substitutes (beef to chicken, McDonald’s to Burger King) and when the item is a big share of your budget. Necessities with no substitutes tend to be inelastic.

Here’s the weird part: going from $100 to $125 is +25%, but going back from $125 to $100 is −20%. Economists fix that with the midpoint method, which divides by the average of the two values. The calculator below uses it.

Elasticity calculator

Try it
% change in price
% change in quantity
Elasticity

Spot it in the wild

RevenueIf demand is inelastic, raising prices increases revenue. If it’s elastic, a price hike can shrink revenue.
GasIn the short run people still have to commute, so gas is famously inelastic.
BrandsBrand loyalty is basically a strategy to make your demand less elastic.

Quick check

Tap an answer.

Price rises 10% and quantity bought drops 50%. Demand is…

50% ÷ 10% = 5. Way bigger than 1, so buyers are very price-sensitive. That’s elastic.

Which is most likely to have inelastic demand?

A necessity with no close substitute. People keep buying it even when the price rises.

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