Elasticity

The Concept of Elasticity:

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Introduction

Elasticity is a measure that economists use to examine the effects of price and income on demand and supply. It can be defined as a measure of responsiveness where it equals percent change in quantity divided by percent change in the variable that caused the quantity to change. Economists frequently measure elasticity because they want to compare markets such as apples to oranges and it does not matter how price or quantity is measured, thus elasticity is a unit-free measurement. It allows economists to quantify the differences among markets without standardizing units of measurement.

There are various types of elasticity, including demand elasticity and supply elasticity. Demand elasticity is the degree to which a change in price effects changes in demand and supply elasticity is when supplies of an item go up the price comes down and vice versa if price goes up supply goes down. Within each type of elasticity we can have price and income elasticities. Price elasticities occur when either the quantity of an item demanded or supplied is responsive to a change in price. Income elasticity is when the quantity of an item is determined by fluctuations in income.

When measuring elasticity we observe that certain goods can have properties of being elastic, inelastic, or unitary elastic. To say demand is elastic would indicate that a change in price would cause a greater change in demand. When demand is inelastic this would indicate that change in price would result in a smaller change in demand. Finally, if we have demand that is unitary elastic this demonstrates that a change in price causes the same change in demand.

Elastic, Inelastic, or Unitary Elastic?

We need to understand how to determine if supply or demand is elastic, inelastic, or unitary. This can be measured by calculating the responsiveness of the quantity demanded of a good to its change in price. The elasticity of quantity demanded with respect to price changes can be computed by taking the percent change in the quantity demanded divided by the percent change in price. The result of this calculation is an absolute value and will tell us if demand is elastic, inelastic, or unitary.

If the result is greater than 1, then it can be shown that demand is elastic. This shows that when there is