When the price of something you're used to paying for increases do you buy less of it? Or if the price suddenly drops do you buy more of it? Economists call this effect the price elasticity of demand. They use a formula to determine just how price elastic the demand for certain goods are. What about that premium coffee you buy on your way to work? What if the price suddenly jumped from $3.00 to $4.50? That's an increase of 50%. Well, you might rightly consider buying your coffee from the drive-up at the fast food place or purchasing your own coffee at the grocery store and brewing it in a travel mug for your commute. The demand for such "luxury" coffee can be considered price elastic. On the other hand, think about this in terms of gasoline. If you're like most Americans you drive a car in order to get to work and run errands. When the price of gas goes up do you stop buying as much gas? Maybe a little bit, but most likely, you continue driving the same number of miles you drove before because you have to. Consequently, you end up purchasing the same number of gallons of gasoline you did last week, even if the price has jumped by 50%. That's because fuel is traditionally price inelastic. The changes in the price do not alter demand by very much in the short run. Factors that affect the price elasticity of demand are the availability of alternative goods or services, levels of discretionary income, and timeframe. As we saw in the example of the coffee, where an alternative source offers a substitute for the "luxury" good demand is price elastic. However, with gasoline there are no good short-term alternatives, so the demand stays relatively flat while prices fluctuate. Your level of discretionary income is also an important factor. If your income level rises or drops, you may find your own reaction to certain goods and services moving in concert. Things you were unwilling to give up before become much easier to do without when your income falls. Also, the timeframe plays an important role in price elasticity of demand. Imagine that gas prices rise, as in the example above, but instead of dropping back down again they stay elevated for years at a time. This would cause people to seriously reconsider their reliance on a personal automobile. We'd see people start to ride bicycles more, or an increase in carpooling, or greater acceptance of public transportation. While the demand for a good may be price inelastic in the short run, it may well become elastic in the long run.