Information about Elasticity (economics)
In economics, elasticity is the ratio of the proportional change in one variable with respect to proportional change in another variable. Price elasticity, for example, is the sensitivity of quantity demanded or supplied to changes in prices. Elasticity is usually expressed as a negative number but shown as a positive percentage value.
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.
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.
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.
and 
. 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 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'.
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).
(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.
An elasticity, defined as a ratio of proportional or percent changes, 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 francs, 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 behaviour.
Economic policy
Monetary policy
Central bank Money supply
Fiscal policy
Spending Deficit Debt
Trade policy
Tariff Trade agreement
Finance
Financial market
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Dependency theory is a body of social science theories, both from developed and developing nations, that are predicated on the notion that there is a center of wealthy states and a periphery of poor, underdeveloped states.
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Applications
One typical 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. 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.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.
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.
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. For example, it applies to price elasticity of demand and price elasticity of supply, in which case the functions of the interest are and . 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 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
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).
(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. |
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.An elasticity, defined as a ratio of proportional or percent changes, 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 francs, 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 behaviour.
See also
- Supply and demand
- Price elasticity of demand
- Price elasticity of supply
- Income elasticity of demand
- Cross elasticity of demand
- Arc elasticity
- Elasticity of import substitution
- Yield elasticity of bond value
References
- Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.
Topics in microeconomics |
|---|
| Scarcity • Opportunity cost • Supply and demand • Elasticity • Economic surplus • Economic shortage • Aggregate demand • Consumer theory • Production, costs, and pricing • Market form • Welfare economics • Market failure |
| Economics topics | Finance topics | Accounting topics | Management topics | Marketing topics | List of economists |
Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold).
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In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
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In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product(A) to a change in price of product (A) alone.
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supply and demand describe market relations between prospective sellers and buyers of a good. The supply and demand model determines price and quantity sold in the market.
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In mathematics, elasticity of a differentiable function f at point x is defined as
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In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
..... Click the link for more information.
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In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product(A) to a change in price of product (A) alone.
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log-log graph or log-log plot is a way of visualizing data that is changing with a power law. Both horizontal and vertical axis are plotted on a logarithmic scale. All functions of the form form straight lines (where b determines the slope and a
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Economic policy
Monetary policy
Central bank Money supply
Fiscal policy
Spending Deficit Debt
Trade policy
Tariff Trade agreement
Finance
Financial market
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In economics, marginal concepts refer to the effect of producing or consuming one more of a good, i.e. at the edge, or margin, of the total produced/consumed.
For example, marginal cost refers to the cost of producing one more unit of some good.
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For example, marginal cost refers to the cost of producing one more unit of some good.
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This article or section may be confusing or unclear for some readers.
Please [improve the article] or discuss this issue on the talk page. This article has been tagged since August 2007.
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Please [improve the article] or discuss this issue on the talk page. This article has been tagged since August 2007.
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Distribution of wealth is a comparison of the wealth of various members or groups in a society, and is one aspect of the economy and social structure. Typically, various racial and ethnic groups possess differing amounts of wealth, and the same is true when people are grouped by
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A good or commodity in economics is any object or service that increases utility, directly or indirectly, not to be confused with good in a moral or ethical sense (see Utilitarianism and consequentialist ethical theory).
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Lagrange multipliers, named after Joseph Louis Lagrange, is a method for finding the extrema of a function of several variables subject to one or more constraints: it is the basic tool in nonlinear constrained optimization.
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Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine allocative efficiency within an economy and the income distribution associated with it.
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Consumer surplus or Consumer's surplus (or in the plural Consumers' surplus) is the difference between the price consumers are willing to pay (or reservation price) and the actual price.
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surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay.
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The Singer-Prebisch thesis (often referred to as the Prebisch-Singer thesis or sometimes the Prebisch-Singer hypothesis) is the observation that the terms of trade between primary products and manufactured goods tend to deteriorate over time.
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Dependency theory is a body of social science theories, both from developed and developing nations, that are predicated on the notion that there is a center of wealthy states and a periphery of poor, underdeveloped states.
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Development economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is on methods of promoting economic growth but also of realizing individual potential for the mass of the population, for example, through
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In dimensional analysis, a dimensionless quantity (or more precisely, a quantity with the dimensions of 1) is a quantity without any physical units and thus a pure number.
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In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
..... Click the link for more information.
..... Click the link for more information.
supply and demand describe market relations between prospective sellers and buyers of a good. The supply and demand model determines price and quantity sold in the market.
..... Click the link for more information.
..... Click the link for more information.
In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
..... Click the link for more information.
..... Click the link for more information.
In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product(A) to a change in price of product (A) alone.
..... Click the link for more information.
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In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income.
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In economics, the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good.
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Arc elasticity is the elasticity of one variable with respect to another between two given points.
The y arc elasticity of x is defined as:
where the percentage change is calculated relative to the midpoint
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The y arc elasticity of x is defined as:
where the percentage change is calculated relative to the midpoint
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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. This is equivalent to saying the derivative of value with respect to yield times the (interest rate/value).
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Ray Clarence Fair (born October 4, 1942 in Fresno, California) is the John M. Musser Professor of Economics at Yale University.
Fair received his B.A. from Fresno State College in 1964 and his Ph.D. from MIT in 1968.
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Fair received his B.A. from Fresno State College in 1964 and his Ph.D. from MIT in 1968.
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