How sensitive is one economic variable to changes in another? If the price of a product increases, how will this affect the quantity demanded? Elasticity is the measure that economists use to answer this sort of question.
Suppose a firm is considering whether to change the price of its product. The firm will be aware that an increase in price will bring in more revenue for each sale that is made. However, the firm will also be aware that a price increase may deter some customers from buying the good. The key issue is of course what will be the net effect of these responses? Will the higher revenue per sale more than compensate for the loss of some customers? Or will so many sales be lost that revenue will fall? Elasticity can shed light on this.
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