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 will sell?"
 "If I raise the price of one good, how will that affect 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 inelasticvariable (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 conceptsas 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 regressionequation 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.
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).