Quick Verdict
When demand is elastic, buyers are price-sensitive: raise the price even a little and they back off in large numbers, so the percentage drop in quantity demanded is bigger than the percentage rise in price. When demand is inelastic, buyers keep buying regardless: raise the price and quantity barely moves, so the percentage drop in quantity is smaller than the percentage rise in price. That one difference — which percentage is bigger — is the entire distinction.
Which one is my exam question about? Ask three quick questions about the good. Does it have close substitutes — other brands, other products that do the same job? If yes, demand tends to be elastic, because buyers can switch. Is it a necessity — something people buy no matter what, like medicine or gasoline to get to work? If yes, demand tends to be inelastic. Does spending on it take up a large share of the buyer's budget? A big budget share means buyers notice price changes and react more strongly, pushing demand toward elastic.
- Branded soda — elastic: many substitute drinks available
- Restaurant burgers — elastic: easy to cook at home or choose another restaurant
- Airline seats (booked in advance) — elastic: flexible travelers shop around
- Gasoline — inelastic: few substitutes for most commuters in the short run
- Insulin — inelastic: a medical necessity with no substitute
- Salt — inelastic: tiny budget share, no substitute, bought out of habit
- Electricity — inelastic: necessity; switching is slow and costly
For the full formal definition and the derivation of price elasticity of demand, see the price elasticity of demand glossary page. To see how elasticity shapes the slope of the demand curve and how supply and demand interact, visit the supply and demand model.