Elastic demand means that demand for a product is sensitive to price changes. For example, if the selling price of a product is increased, there will be fewer units sold. If the selling price of a product decreases, there will be an increase in the number of units sold. Elastic demand is also referred to as the price elasticity of demand.

The term inelastic demand means that the demand for a product is not sensitive to price changes.

Elastic demand is a major concern for a manufacturer that attempts to set product prices based on costs. For instance, if the manufacturer’s production and sales have declined and it fails to cut fixed costs, the manufacturer could be worse off by increasing selling prices.

Use the search box on AccountingCoach.com for our Q&A on death spiral which is pertinent to elastic demand.

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