measurement of the responsiveness, or sensitivity, of one variable to a

change in another variable.

Elasticity has a variety of uses in economics. For example, when a company

is deciding on a pricing strategy, it needs to know which proposed price will

generate the most total revenue. The elasticity measurement will answer

that question. Another example would be a producers' tax proposed on the

sale of a particular product. How much of the tax will the producers pay, and

how much of it will the consumers end up paying through higher prices?

How much tax will be collected? How much will this change the quantity of

the product that consumers purchase? The answers depend on the

elasticity measurement. In the extreme case of price controls imposed by

the government: price controls distort market equilibrium, but how much

will output fall with price controls? Elasticity again determines the answer.

Many students have trouble understanding elasticity because the concept

is often taught with the use of formulas that look cumbersome, and are

difficult to memorize. The way I explain it here is different. I teach the

concepts behind the formulas. All it takes is an understanding of the

concepts, and the formulas just fall into place. The is no need for

memorization. Students who understand the concepts, beginning with the

explanation in the following paragraphs, should have no difficulty with the

numbers or formulas involved.

So here is the first, and most important concept: the discussions relating to

specific types of elasticities, with links in the list to the left, follow from an

understanding of this:

All types of elasticities are numbers, which represent measurements based

on two variables. These measurements are formed using division, and are

based on percentage changes in each variable used.

These measurements are formed by dividing the percentage change in one

(dependent) variable by the percentage change in another (independent)

variable. This should be easier to understand by realizing that it is a formula

that will yield a number; by putting the dependent variable on top the result

will be a measure of its responsiveness to changes in the independent

variable.

The results of such a formula will center around the number 1 (that is the

case, mathematically, when division is used to compare 2 numbers). Higher

than 1 means, mathematically, that the top number is larger than the bottom

number; lower than 1, the bottom number is larger than the top number; and

equal to 1, the two numbers are identical.

Higher than 1 (representing a change in the top number that is greater than

the change in the bottom number) is relatively responsive, and is called

elastic; lower than 1 (representing a change in the bottom number that is

greater than the change in the top number) is relatively unresponsive and

is called inelastic; equal to 1 means that the changes are neutral, and is

called unit elastic.

This covers all situations, but the extreme cases where one variable does

not change at all with any change in the other variable (either the top or the

bottom of the formula equals zero) have special names: Perfectly elastic

(zero for the bottom number, or infinite elasticity) and perfectly inelastic

(zero for the top number, or zero elasticity).

For an explanation of specific topics relating to elasticity in economics, click

on the links on the left side of this page. Most students start with the

Elasticity |

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