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- Financial Dictionary
In economics, elasticity refers to a relationship between two variables. If a change in one variable produces no significant change in the other, then the relationship is said to be elastic. If a change in one variable produces a significant change in the other, then the relationship is said to be inelastic.
An example of elasticity is price elasticity of demand. The variables here are price and demand. A change in the price of luxury goods will normally lead to a change in demand, whereas a change in the price of food will not. Two factors determining elasticity are necessity and the availability of substitutes. Luxury goods are highly unnecessary; hence their price elasticity is elastic. Food is highly necessary and there are no substitutes for it; hence its price elasticity is very inelastic.