Price Elasticity of Demand: What It Is and Why It Matters

What Is Price Elasticity of Demand?

By Lee Samaha – Updated Oct 13, 2025 at 7:24 PM

Key Points

Price elasticity measures how demand changes with price adjustments; key for investment decisions.
Investors should focus on companies developing inelastic products for greater pricing power.
Understanding elasticity helps predict company resilience to price changes and guides investment choices.

Price elasticity of demand is a crucial concept to understand in investing. It helps investors understand whether a company has pricing power or not. Can it increase profits by raising prices, leading to increased profits? Or will the price increase lead to a drop in demand that ultimately hurts profits? A basic understanding of price elasticity will help you answer critical questions about the stock you are considering investing in.

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Table by Author
Condition	Change in Demand	Change in Price	Price Elasticity of Demand	Examples
Perfectly Price- Inelastic	0%	10%	0	Lifesaving pharmaceuticals
Unitary Elastic Demand	10%	10%	1	Many goods
Perfectly Price- Elastic	∞	10%	∞	Commodity producers selling in a open market

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Research and Development (R&D)

The researching and developing of new products and services for a business.

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Industrial conglomerates such as Honeywell International (HON -0.94%) provide an interesting case to consider. It tends to have price-elastic products, but it can invest in research and development to produce new differentiated products. These products tend to have more pricing power and usually higher margins. The newer products are more price-inelastic than the older versions, so Honeywell will see less of a drop in demand by selling them at a higher price than by doing the same with older products. Meanwhile, Honeywell can focus on reducing costs with its older, more price-elastic products.

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About the Author

Lee Samaha is a contributing Stock Market Analyst at The Motley Fool covering industrials, electricals, energy, materials, transportation, and infrastructure stocks. Prior to The Motley Fool, Lee was a Civil Engineer and Investment Manager. He holds a Bachelor of Civil and Structural Engineering from Southampton University and a Certificate in Investment Management from Chartered Institute for Securities & Investment. Lee first cut his investing teeth on The Motley Fool bulletin boards (commonly referred to as the “Fool Boards,”) and he’s infinitely grateful to all of the investors he learned from in this powerful investing community.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.