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In economics, elasticity is the measurement of how an economic variable responds to a change
in another. It gives answers to questions such as:

 "If I lower the price of a product, how much more I will sell?"
 "If I raise the price of one good, how will that affect the sales of this other good?"

 "If the market price of a product goes down, how much will that affect the amount that
firms will be willing to supply to the market?"

An elastic variable (with elasticity value greater than 1) is one which responds more than
proportionally to changes in other variables. In contrast, an inelastic variable (with elasticity
value less than 1) is one which changes less than proportionally in response to changes in other
variables. A variable can have different values of its elasticity at different starting points: for
example, the quantity of a good supplied by producers might be elastic at low prices but inelastic
at higher prices, so that a rise from an initially low price might bring on a more-than-
proportionate increase in quantity supplied while a rise from an initially high price might bring
on a less-than-proportionate rise in quantity supplied.

Elasticity can be quantified as the ratio of the percentage change in one variable to the
percentage change in another variable, when the latter variable has a causal influence on the
former. A more precise definition is given in terms of differential calculus. It is a tool for
measuring the responsiveness of one variable to changes in another, causative variable. Elasticity
has the advantage of being a unitless ratio, independent of the type of quantities being varied.
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 substitution.

Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in
understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of
the firm, and distribution of wealth and different types of goods as they relate to the theory of
consumer choice. Elasticity is also crucially important in any discussion of welfare distribution,
in particular consumer surplus, producer surplus, or government surplus.

In empirical work an elasticity is the estimated coefficient in a linear regression equation where
both the dependent variable and the independent variable are in natural logs. Elasticity is a
popular tool among empiricists because it is independent of units and thus simplifies data
analysis.

A major study of the price elasticity of supply and the price elasticity of demand for US products
was undertaken by Joshua Levy and Trevor Pollock in the late 1960s.[1]

Contents
 1Mathematical construct
  2Specific elasticities
o 2.1Elasticities of supply
o 2.2Elasticities of demand
 3Applications
 4Variants
 5See also
 6Footnotes
 7External links

Mathematical construct[edit]

perfect P-elasticity of Q: Q changes while P = constant

perfect P-inelasticity of Q: P changes while Q = constant

Conventional demand curve (downwards linear slope), with its elasticity

Elasticity indicates responsiveness. In mathematics, x-elasticity of y measures the

responsiveness/fractional change of y with respect to x, i.e. how much y changes fractionally
when x changes fractionally.

x-elasticity of y:

In economics, the common elasticities are price-elasticity of quantity-demanded (elasticity of

demand), price-elasticity of quantity-supplied (elasticity of supply) and price-of-a-different-
good-elasticity of quantity-demanded (cross-price elasticity). They all have the same form:

P-elasticity of Q: if continuous, or if discrete.

elastic Q changes more than P

unit elastic Q changes like P

inelastic Q changes less than P

Special cases:

perfect P-elasticity of Q, , Q changes while P = constant

perfect P-inelasticity of Q, , P changes while Q = constant

Elasticity are commonly used because of its connection to revenue: revenue attains critical

value (local max/min) when

For conventional price-elasticity of quantity-demanded (downwards linear demand curve),

revenue reaches global maximum when (unit elastic). Hence, to maximize profit, firms
must:

increase price if inelastic

decrease price if elastic

Specific elasticities[edit]
Elasticities of supply[edit]

Price elasticity of supply

Main article: Price elasticity of supply

The price elasticity of supply measures how the amount of a good that a supplier wishes to
supply changes in response to a change in price.[2] In a manner analogous to the price elasticity of
demand, it captures the extent of horizontal movement along the supply curve relative to the
extent of vertical movement. If the price elasticity of supply is zero the supply of a good supplied
is "totally inelastic" and the quantity supplied is fixed.

Elasticities of scale
Main article: Returns to scale

Elasticity of scale or output elasticity measures the percentage change in output induced by a
collective percent change in the usages of all inputs.[3] 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). It exhibits increasing returns to scale if a percentage change in
inputs results in greater percentage change in output (an elasticity greater than 1). The definition
of decreasing returns to scale is analogous.[4][5] [6][7]

Elasticities of demand[edit]

Price elasticity of demand

Main article: Price elasticity of demand

Price elasticity of demand is a measure used to show the responsiveness, or elasticity, of the
quantity demanded of a good or service to a change in its price. More precisely, it gives the
percentage change in quantity demanded in response to a one percent change in price (ceteris
paribus, i.e. holding constant all the other determinants of demand, such as income).

Cross-price elasticity of demand

Main article: Cross price elasticity

Cross-price elasticity of demand is a measure of the responsiveness of the demand for one
product to changes in the price of a different product. It is the ratio of percentage change in the
former to the percentage change in the latter. If it is positive, the goods are called substitutes
because a rise in the price of the other good causes consumers to substitute away from buying as
much of the other good as before and into buying more of this good. If it is negative, the goods
are called complements.

Applications[edit]
The concept of elasticity has an extraordinarily wide range of applications in economics. In
particular, an understanding of elasticity is fundamental in understanding the response of supply
and demand in a market.

Some common uses of elasticity include:

 Effect of changing price on firm revenue. See Markup rule.

 Analysis of incidence of the tax burden and other government policies. See Tax
incidence.
 Income elasticity of demand, used as an indicator of industry health, future consumption
patterns and as a guide to firms' investment decisions. See Income elasticity of demand.
 Effect of international trade and terms of trade effects. See Marshall–Lerner condition
and Singer–Prebisch thesis.
 Analysis of consumption and saving behavior. See Permanent income hypothesis.
 Analysis of advertising on consumer demand for particular goods. See Advertising
elasticity of demand

Variants[edit]
In some cases the discrete (non-infinitesimal) arc elasticity is used instead. In other cases, such
as modified duration in bond trading, a percentage change in output is divided by a unit (not
percentage) change in input, yielding a semi-elasticity instead.