In economics, elasticity is the ratio of the proportionate change in one variable with respect to proportional change in another variable, such as the responsiveness of the price of a commodity to changes in market demand or visa-versa. In terms of elasticity, a market or good can be described as elastic or inelastic as a means of describing its responsiveness to the proportionate change in another quantity. Image File history File links Mergefrom. ... Image File history File links Question_book-3. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ...

Applications

One application of the concept of elasticity is to consider what happens to consumer demand for a good (for example, apples) when prices increase. As the price of a good rises, consumers will usually demand a lower quantity of that good, perhaps by consuming less, substituting other goods, and so on. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good, by consuming more, dropping substitutes, and so forth. However, there may be some goods that consumers require, cannot consume less of, and cannot find substitutes for even if prices rise (for example, certain prescription drugs). Another example is oil and its derivatives such as gasoline. For such goods, the price elasticity of demand might be considered inelastic. In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price. ...

Further, elasticity will normally be different in the short term and the long term. For example, for many goods the supply can be increased over time by locating alternative sources, investing in an expansion of production capacity, or developing competitive products which can substitute. One might therefore expect that the price elasticity of supply will be greater in the long term than the short term for such a good, that is, that supply can adjust to price changes to a greater degree over a longer time. In economics, the price elasticity of supply measures the responsiveness of the quantity supplied of a good to its price. ...

This applies to the demand side as well. For example, if the price of petrol rises, consumers will find ways to conserve their use of the resource. However, some of these ways, like finding a more fuel-efficient car, take time. So consumers as well may be less able to adapt to price shocks in the short term than in the long term.

The concept of elasticity has an extraordinarily wide range of applications in economics. In particular, an understanding of elasticity is useful to understand the dynamic response of supply and demand in a market, in order to achieve an intended result or avoid unintended results. For example, a business considering a price increase might find that doing so lowers profits if demand is highly elastic, as sales would fall sharply. Similarly, a business considering a price cut might find that it does not increase sales, if demand for the product is price inelastic. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...

An example of how elasticity can be useful in business situations can be shown by the equation MR = P * (1+E)/E, where MR is marginal revenue, P is price of the good, and E is the own price elasticity of demand for the good. Notice that when E is less than negative one, demand is elastic. When E is between negative one and zero, demand is inelastic. And at E=-1, demand is unit elastic (or unitary elastic), and thus MC=MB and MNB=0.

Mathematical definition

In economics, the definition of elasticity is based on the mathematical notion of point elasticity^{[citation needed]}. For example, it applies to price elasticity of demand and price elasticity of supply, in which case the functions of the interest are Q^d(P) and Q^s(P). When working with graphs, it is common to put Quantity on x-axis and Price on y-axis, thus the function of the interest is x(y) rather than commonly used in mathematics y(x). In mathematics, elasticity of a differentiable function at point is defined as Its the ratio of the incremental percentage change of the function with respect to an incremental percentage change of the argument. ... In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price. ... In economics, the price elasticity of supply measures the responsiveness of the quantity supplied of a good to its price. ...

In general, the "y-elasticity of x" is:

.

or, in terms of percentage change

The "y-elasticity of x" is also called "the elasticity of x with respect to y".

It is typical to represent elasticity as 'E', 'e' or lowercase epsilon, 'ε'.

Examples

Unit elasticity for a supply line passing through the origin.

A common mistake for students and teachers of economics is to confuse elasticity with slope. (Case & Fair, 1999: 108, 109). Elasticity is the slope of a curve on a loglog graph only, not on a regular graph (taking into account whether the independent variable is on the horizontal or the vertical axis). Consider the information in the figure. This is a special case which illustrates that slope and elasticity are different. In the above example the slope of S₁ is clearly different from the slope of S₂, but since the rate of change of P relative to Q is always proportionate, both S₁ and S₂ are unit elastic (i.e. E = 1). A log-log plot of y=x (green), y=x^2 (blue), and y=x^3 (red). ...

(Keeping in mind the example of price elasticity of demand, these figures show x = Q horizontal and y = P vertical).

Illustrations of perfect elasticity and perfect inelasticity.

The demand curve (D1) is perfectly ("infinitely") elastic.

The demand curve (D2) is perfectly inelastic.

Image File history File links Download high resolution version (1023x991, 9 KB) A general example of perfect elasticity. ... Image File history File links Download high resolution version (1023x991, 9 KB) A general example of perfect elasticity. ... Image File history File links Download high resolution version (1023x991, 9 KB) A general example of perfect inelasticity. ... Image File history File links Download high resolution version (1023x991, 9 KB) A general example of perfect inelasticity. ...

Importance

Elasticity is an important concept in understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of the firm, distribution of wealth and different types of goods as they relate to the theory of consumer choice and the Lagrange multiplier. Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus, producer surplus, or government surplus. The concept of elasticity was also an important component of the Singer-Prebisch thesis which is a central argument in dependency theory as it relates to development economics. Microeconomic term related to who pays for the tax of a product, who has the burden of paying the tax. ... In economics, marginal concepts refer to the effect of producing or consuming one more of a good, i. ... The theory of the firm consists of a number of economic theories which describe the nature of the firm (company or corporation), including its behaviour and its relationship with the market. ... Differences in national income equality around the world as measured by the national Gini coefficient. ... A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ... In mathematical optimization problems, Lagrange multipliers are a method for dealing with constraints. ... Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocational efficiency of a macroeconomy and the income distribution associated with it. ... Supply curve shift Consumer surplus or Consumers surplus (or in the plural Consumers surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. ... This page deals with the various forms of economic surplus, including producer, consumer, government, and social/total surplus. ... It has been suggested that Prebish-Singer be merged into this article or section. ... Main International Relations Theories Politics Portal This box:      Dependency theory is a body of social science theories, both from developed and developing nations, that create a worldview which suggests that poor underdeveloped states of the periphery are exploited by wealthy developed nations of the centre, in order to sustain economic... This article does not cite any references or sources. ...

Elasticity as described above is necessarily dimensionless -- meaning that it is independent of units of measurement. For example, the value of the price elasticity of demand for gasoline would be the same whether prices were measured in dollars or euros, or quantities in tonnes or gallons. This unit-independence is the main reason why elasticity is so popular a measure of the responsiveness of economic behavior. In the physical sciences, a dimensionless number (or more precisely, a number with the dimensions of 1) is a quantity which describes a certain physical system and which is a pure number without any physical units; it does not change if one alters ones system of units of measurement... In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price. ...

See also

• Microeconomics
• Supply and demand
• Price elasticity of demand
• Price elasticity of supply
• Income elasticity of demand
• Cross elasticity of demand
• Arc elasticity
• Yield elasticity of bond value

Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price. ... In economics, the price elasticity of supply measures the responsiveness of the quantity supplied of a good to its price. ... In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the income of the people demanding the good. ... In economics, the cross elasticity of demand or cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... Yield elasticity of bond value is the percentage change in bond value divided by a one per percentage change in the yield to maturity of the bond. ...

References

• Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.

Ray C. Fair (born October 4, 1942 in Fresno, California) is the John M. Musser Professor of Economics at Yale University. ... Prentice Hall is a leading educational publisher. ...

External links

• Economics Basics: Elasticity from Investopedia.com. Accessed February 29, 2008.
• Revenue and Elasticity and Elasticity, Total Revenue, and the Linear Demand Curve by Fiona Maclachlan, The Wolfram Demonstrations Project.