In economics, elasticity is the measurement of how responsive an economic variable is to a change

in another. For example:

"If I lower the price of my product, how much more will I sell?"
"If I raise the price of one good, how will that affect sales of this other good?"
"If we learn that a resource is becoming scarce, will people scramble to acquire it?"
An elastic variable (or elasticity value greater than 1) is one which responds more than proportionally
to changes in other variables. In contrast, an inelastic variable (or elasticity value less than 1) is one
which changes less than proportionally in response to changes in other variables.
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 concepts as 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
particularconsumer surplus, producer surplus, or government surplus.
In empirical work an elasticity is the estimated coefficient in a linear regression equation where both
the dependent variable and theindependent variable are in natural logs. Elasticity is a popular tool
among empiricists because it is independent of units and thus simplifies data analysis.
A major study of the price elasticity of supply and the price elasticity of demand for US products was
undertaken by Hendrik S. Houthakker and Lester D. Taylor.
[1]

Contents
1 Specific elasticities
o 1.1 Elasticities of supply
o 1.2 Elasticities of demand
2 Applications
3 Variants
4 See also
5 Footnotes
6 External links
Specific elasticities[edit]
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 movement along the supply curve. If the price
elasticity of supply is zero the supply of a good supplied is "inelastic" and the quantity
supplied is fixed.
Elasticities of scale
Main article: Returns to scale
Elasticity of scale or output elasticities measure the percentage change in output induced by
a percent change in inputs.
[3]
A production function or process is said to exhibitconstant
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]

Elasticities of demand[edit]
Price elasticity of demand
Main article: Price elasticity of demand
Price elasticity of demand is a measure used in economics 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).
Applications[edit]
The concept of elasticity has an extraordinarily wide range of applications in economics. In
particular, an understanding of elasticity is fundamental in understanding the response
of supply and demand in a market.
Some common uses of elasticity include:
Effect of changing price on firm revenue. See Markup rule.
Analysis of incidence of the tax burden and other government policies. See Tax
incidence.
Income elasticity of demand can be used as an indicator of industry health, future
consumption patterns and as a guide to firms investment decisions. See Income
elasticity of demand.
Effect of international trade and terms of trade effects. See MarshallLerner
condition and SingerPrebisch thesis.
Analysis of consumption and saving behavior. See Permanent income hypothesis.
Analysis of advertising on consumer demand for particular goods. See Advertising
elasticity of demand
Variants[edit]
In some cases the discrete (non-infinitesimal) arc elasticity is used instead. In other cases,
such as modified duration in bond trading, a percentage change in output is divided by a unit
(not percentage) change in input, yielding a semi-elasticity instead.