On first impulse one might think that price fluctuation would be greater under an elastic than under an inelastic demand. But such is not the case. The very moment the price of a good with an elastic demand starts to fall, numerous buyers will come into the market, with the result that the fall in price is retarded and soon stopped. Likewise, an increase in price diminishes at once the demand, which in turn tends to keep the price down. In the case of goods with an inelastic demand, however, such retarding influences are much less effective. A change in the price of salt affects demand but slightly. Few new customers appear when the price declines, few quit buying when the price rises. The importance of this economic principle appears when we consider it in connection with the production of wealth. A bumper crop of wheat, for example, is likely to result in rock-bottom prices with a considerable loss to wheat-growers. On the other hand, the manufacturer of some luxury who should overestimate the demand for his product to the same degree, would suffer a less proportionate loss than the farmers, for multitudes of potential buyers are ready to buy just as soon as the price of the luxury is slightly reduced.

The close relation of price fluctuations to the two kinds of demand, has a practical significance in business, particularly in retailing. It is a common practice of merchants in all lines to advertise cut prices, hoping thereby to increase trade in the merchandise they advertise. Obviously, any increase in trade a merchant may hope to get must either come from his competitors or arise from an increased demand for those particular goods. Whether or not the goods advertised have an elastic or an inelastic demand, the advertising merchant will profit from any trade he may get from the regular customers of his competitors, provided he sells at a profit. Also, in goods subject to an elastic demand, there is always the probability that the advertising merchant may increase his sales, not at the expense of his competitors, but by increasing demand for the goods which he advertises. In goods subject to inelastic demand the case is different. If he offers such goods at reduced prices, his customers stock up and then refrain from buying more until their stock is exhausted; and what is not less important, his competitors reduce prices on the same goods. In such cases buyers profit at the expense of the competing merchants, who are unable to recoup themselves, simply because the goods under consideration are subject to the law of inelastic demand. A jeweler, for example, can well afford to attempt to increase his trade by selling diamonds on a lower margin of profit than his competitors, for by so doing he stands a chance, not only to sell to some of the regular customers of his competitors, but also to those who otherwise would not buy diamonds; and thus in the long run, on account of increased sales, to increase his profits. The grocer, however, finds his position more difficult. By selling coffee or sugar or salt at reduced prices he can hope to increase sales only at the expense of his competitors or at the expense of his own future sales; he often does, however, sell such commodities on a close margin or even at a loss in order to induce new customers to come into his store.