Always draw this diagram as your initial step. Suppose you are the manager of the t. Subway has been running at a loss for ever, but is subsidized by the governor (or any government figure) Suppose that the governing body demands you reduce your losses, and rise your revenue. Suppose you decide to raise fares in order to increase revenue. Revenue = p x q (price times quantity) With a small elasticity, when the price rises the revenue increases. When the demand curve is flat = big elasticity. With a big elasticity = revenue is not gonna increase with higher price. Elasticity is a ratio of % changes (price) elast. Of demand = %change in quantity demanded / change in price. (difference in qs / average q) / (difference in ps / average p) Medicines you need to live, substances you are addicted too etc. This is the case of a perfect substitute.