Elasticity Matters

Not all products respond equally to price changes. Price elasticity measures how sensitive demand is. Insulin is highly inelastic — diabetics need it regardless of cost. Even when U.S. list prices climbed to hundreds of dollars per vial, far above production cost, people kept buying, precisely because demand cannot drop.

Designer handbags are highly elastic — a price increase sends shoppers to cheaper alternatives instantly. Elasticity also explains why governments tax cigarettes heavily: demand barely drops, so revenue pours in. Airlines lean on the same idea, adjusting ticket prices many times a day in response to traveler demand.