Raise the price of insulin and people still buy it. Raise the price of a brand of cereal and shoppers switch to a cheaper box. The difference is elasticity, a measure of how much quantity demanded or supplied responds to a change in price. Elastic goods are sensitive. Inelastic goods are not.

Elasticity is calculated as the percentage change in quantity divided by the percentage change in price. If a 10 percent price hike causes a 20 percent drop in sales, elasticity is 2, which is elastic. If it causes a 2 percent drop, elasticity is 0.2, which is inelastic. Necessities like fuel and medicine tend to be inelastic. Luxuries and goods with many substitutes tend to be elastic.

The concept matters for businesses and governments alike. A firm raising prices on an elastic good will lose more revenue than it gains. A government taxing an inelastic good, like cigarettes or gasoline, can raise money with less behavioral change. That is why so-called sin taxes are popular with finance ministries.

What makes demand elastic

• Availability of substitutes
• Share of income spent on the good
• Whether the good is a necessity or luxury
• Time horizon: demand is more elastic in the long run
• Number of uses for the product