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Price Sensitivity

Definition

Price sensitivity refers to how responsive the quantity demanded of a good or service is to changes in its price. If a small change in price leads to a large change in quantity demanded, the demand is considered elastic. If a large change in price leads to only a small change in quantity demanded, the demand is considered inelastic.

Analogy

Think of price sensitivity like being on a seesaw. When demand is elastic, it's like having two people of different weights on each end of the seesaw - even a small push can cause one person to go flying up or down. On the other hand, when demand is inelastic, it's like having two people of similar weights on each end - no matter how hard you push, they won't move much.

Related terms

Elastic Demand: Elastic demand occurs when a small change in price leads to a relatively larger change in quantity demanded.

Inelastic Demand: Inelastic demand occurs when a large change in price leads to only a small change in quantity demanded.

Cross Elasticity of Demand: Cross elasticity of demand measures how sensitive the quantity demanded of one good is to changes in the price of another good.