EconGuru Economics Guide » Elasticity

Elasticity

Variables vary with each other, the change of any single variable must have been the result of that of another. Generally speaking, elasticity is the ratio of incremental percentage in one variable (A) over that in another (B). It describes how sharply a variable react to another's change. It is positive if A changes in the same direction as B, or negative if they change in opposite directions. However, we are just interested in the ratio alone, so elasticity is usually calculated positive.

In economics, one typical application of elasticity is the price elasticity of demand. We all understand goods and services would be more demanded given a fall in price. But how much or how sharply? How much more amount would be demanded if price falls by 1 dollar? That's the job of elasticity.

Similarly, price elasticity of supply is used to depict the ratio of incremental percentage of amount supplied over that of price; income elasticity of demand indicates how demand of certain good or service changes as earnings of households change.