Elastic Demand-Elastic demand occurs when a specific percentage change in price results in higher percentage of quantity demanded.

Elasticity of demand will be greater than one in such cases. For example, if the price of an item is lowered by four percent and quantity demanded rises by eight percent, then demand for that item is elastic because .08/.04 equals 2. Inelastic Demand-If an item has a percentage change in price that results in a lower percentage of quantity demand, inelastic demand will occur. This will happen because elasticity of demand will be lower than one. For example, if an item is cut back eight percent but demand only rises four percent, elasticity of demand will be less than 1 (.5 in this case). Unit Elasticity-Unit Elasticity occurs when the percentage of the price change and the percentage of the quantity demand are equal. If an item drops its price 82 percent and demand rises 82 percent, then elasticity of demand is equal to one and unit elasticity has occurred. Cross price elasticity of demand measures how the price change in one good affects the quantity demanded in another good. If two goods are substitutes, then a price change in one will affect the demand of the other. For example, consumers have many brands of gum to choose from including Orbit and Trident. If Orbit were to raise their prices, more people would purchase Trident. If two goods are complements to each other, then a price increase in one will lower demand for both products. Income elasticity measures how much consumers buy more or less of an item in response to a change in their income. For most goods, the income-elasticity coefficient is positive. This means that more of them are bought when income rises. Those types of goods are called normal goods. Inferior goods are goods that are bought less as income rises. Inferior goods have an income-elasticity coefficient that is negative.

When the price of an item is higher in relation to a consumers income, the greater the price elasticity of demand is. When the price of small ticket items, like Lemonheads, increase by 50%, this only amounts to a few pennies relative to consumers income and demand is unlikely to decrease much. Price elasticity for these items tends to be low. When the cost of big ticket items increase by 50%, (like cars or houses) this amounts to thousands of dollars relative to consumer income and demand will drop significantly. Price elasticity is high for big ticket items. Using the Consumers Time Horizon concept, elasticity of demand is likely to increase as the time horizon increases (long run) and decrease as the time horizon decreases (short run). When a product increase happens overnight, consumers cannot cope with the change and are unlikely to change their demand for the product. Over a long time horizon, consumers have time to adapt to the price change and adapt their behaviors and demands. On the corresponding graph, the 80-51 price range is elastic. This is because when price falls and total revenue increases, demand is elastic. The 50-40 price range is unit-elastic. This is happens because the price is falling, but total revenue is not. 39-0 is inelastic. This happens when the price drops but the total revenue also drops.