Aside from knowing that consumers
buy more when the price falls or less when
price rises, producers also need to know
the size of the change in quality.
In economics, elasticity is the measurement
of how changing one economic variable affects
others. For example:
• "If I lower the price of my product, how much
more will I sell?"
• "If I raise the price, how much less will I sell?"
• "If we learn that a resource is becoming scarce,
will people scramble to acquire it?"
• In more It is a tool for measuring the
responsiveness of a function to changes in
parameters in a unitless way. Frequently used
elasticities include price elasticity of
demand, price elasticity of supply,income
elasticity of demand, elasticity of
substitution between factors of
production and elasticity of intertemporal
• The definition of elasticity is based on the
mathematical notion of point elasticity.
• In general, the "x-elasticity of y", also
called the "elasticity of y with respect
to x", is:
• Elasticities of demand
• Price elasticity of demand measures the
percentage change in quantity demanded
caused by a percent change in price. As such, it
measures the extent of movement along the
demand curve. This elasticity is almost always
negative and is usually expressed in terms of
absolute value (i.e. as positive numbers) since
the negative can be assumed.
• Income elasticity of demand
Income elasticity of demand measures
the percentage change in demand caused
by a percent change in income. A change
in income causes the demand curve to
shift reflecting the change in demand.
• Cross price elasticity of demand
Cross price elasticity of demand measures
the percentage change in demand for a
particular good caused by a percent change in
the price of another good. Goods can be
complements, substitutes or unrelated.
• Cross elasticity of demand between
Cross elasticity of demand for firms,
sometimes referred to as conjectural variation, is
a measure of the interdependence between
firms. It captures the extent to which one firm
reacts to changes in strategic variables (price,
quantity, location, advertising, etc.) made by
• Elasticity of intertemporal substitution
• Combined Effects
It is possible to consider the combined
effects of two or more determinant of demand.
The steps are as follows: PED = (∆Q/∆P) x P/Q.
Convert this to the predictive equation: ∆Q/Q =
PED(∆P/P) if you wish to find the combined
effect of changes in two or more determinants of
demand you simply add the separate effects:
∆Q/Q = PED(∆P/P) + YED(∆Y/Y)
• Elasticities of supply
• Price elasticity of supply
• The price elasticity of supply measures
how the amount of a good firms wish to
supply changes in response to a change in
price. In a manner analogous to the price
elasticity of demand, it captures the extent
of movement along the supply curve.
• Elasticities of scale
• Elasticity of scale or output elasticities
measure the percentage change in output
induced by a percent change in
inputs. A production function or process is
said to exhibit constant returns to scale if a
percentage change in inputs results in an
equal percentage in outputs (an elasticity
equal to 1).