Elasticity is defined as percentage change in quantity divided by percentage change in some variable that affects demand (or supply) or quantity demanded (or supplied). The most common elasticity concept used is price elasticity.
ED = Percentage change in quantity demanded / Percentage change in price
ES = Percentage change in quantity supplied / Percentage change in price
Elasticity is a better descriptor than is slope because it is independent of units of measurement.
To calculate percentage changes in prices and quantities, use the average of the end values.
Five elasticity terms are: elastic (E > 1); inelastic (E < 1); unit elastic (E = 1);perfectly inelastic (E = 0); and perfectly elastic (E = ∞).
The more substitutes a good has, the greater its elasticity.
Factors affecting the number of substitutes in demand are (1) time period considered, (2) the degree to which the good is a luxury, (3) the market definition, and (4) the importance of the good in one's budget.
The most important factor affecting the number of substitutes in supply is time. As the time interval lengthens, supply becomes more elastic.
Elasticity changes along straight-line demand and supply curves. Demand becomes less elastic as we move down along a demand curve.
When a supplier raises price, if demand is inelastic, total revenue increases; if demand is elastic, total revenue decreases; if demand is unit elastic, total revenue remains constant.
Other important elasticity concepts are income elasticity and cross-price elasticity of demand.
Income elasticity of demand = Percentage change in demand / Percentage change in income
Cross-price elasticity of demand = Percentage change in demand / Percentage change in price of a related good
Knowing elasticities allows us to be more precise about the qualitative effects that shifts in demand and supply have on prices and quantities.
When demand shifts,
Percentage change in price = Percentage change in demand / ED + ES
When supply shifts,
Percentage change in price = Percentage change in supply / ED + ES
