Elasticity (economics)
Measuring responsiveness in economics.
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One economic variable's sensitivity to changes in another is what elasticity measures in economics; for instance, a price elasticity of demand of -2 means a 10% price increase reduces quantity demanded by 20%.[1] Price elasticity of demand, cross-price elasticity of demand, and income elasticity of demand are the three main categories of elasticity that economists use.[2]
Key facts and history
The concept of price elasticity was first cited in an informal form in Alfred Marshall's 1890 book Principles of Economics.[3] The price elasticity of supply measures how the amount a supplier wishes to supply changes in response to a price change.[4] Cross-price elasticity of demand measures the sensitivity of quantity demanded for one good when the price of another good changes.[5] In the late 1960s, Joshua Levy and Trevor Pollock conducted a significant investigation into the price elasticity of both supply and demand for products in the United States.[3]
The responsiveness of the quantity demanded for a good or service to shifts in consumer income is captured by the income elasticity of demand.[6] Output elasticity, or elasticity of scale, is defined as the percentage change in output resulting from a collective percentage change in the usage of all inputs.[7] In empirical work, when both the dependent and independent variables are transformed into natural logs within a linear regression, the estimated coefficient directly provides the elasticity.[8] Because elasticity is unit-free, it simplifies data analysis and is therefore widely used by empiricists.[8]
What the cited sources add
The Corporate Finance Institute account states that the four factors affecting price elasticity of demand are availability of substitutes, whether the good is a luxury or necessity, the proportion of income spent, and time elapsed since the price change.[2] The same source notes that if income elasticity is positive, the good is normal, and if negative, the good is inferior.[2] The OpenStax textbook explains that the concept of elasticity is borrowed from engineering and physics, where it measures a material's responsiveness to a physical force.[9] The OpenStax textbook also details that along a straight-line demand curve, elasticity changes continuously as scale changes while the slope remains constant.[9]
The Corporate Finance Institute account defines cross-price elasticity of demand as measuring how demand for one good is impacted by a change in the price of another good.[2] The OpenStax textbook provides an example where a 50-cent price increase on gasoline from $3.00 generating a decline from 50 to 48 gallons yields an elasticity of 0.25.[9]
References
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: Hayes, "What Is Elasticity in Finance; How Does it Work (with Example)?", Investopedia, 2022-07-05 (original not read by us) en.wikipedia.org
- "Elasticity", Corporate Finance Institute. facts only, no text reused. corporatefinanceinstitute.com
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: L.F.G., "The concept of elasticity and strategies for teaching it in introductory courses of economics", Semestre Económico, Apr–Jun 2019, p. 149–167; Taylor, "Consumer demand in the United States : prices, income, and consumption behavior", Springer, 2010 (original not read by us) en.wikipedia.org
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: Perloff, J. (2008). p.36. (original not read by us) en.wikipedia.org
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: Hayes, "Understanding the Cross Elasticity of Demand", Investopedia (original not read by us) en.wikipedia.org
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: Gans, "Principles of Microeconomics", Cengage Learning, 2017, p. 107 (original not read by us) en.wikipedia.org
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: Varian (1992). pp.16–17. (original not read by us) en.wikipedia.org
- Wikipedia, "Elasticity (economics)" (CC BY-SA 4.0), which cites: "13.5 Interpretation of Regression Coefficients: Elasticity and Logarithmic Transformation - Introductory Business Statistics OpenStax", openstax.org (we also read that source) en.wikipedia.org
- "13.5 Interpretation of Regression Coefficients: Elasticity and Logarithmic Transformation - Introductory Business Statistics OpenStax", openstax.org. facts only, no text reused. openstax.org
Each numbered sentence above was checked against the source it cites before publication. Sentences citing Wikipedia adapt text from the English Wikipedia article Elasticity (economics) (contributors), used under CC BY-SA 4.0; this entry is available under the same licence. Other sources were used for facts only; no text or images are copied from them.
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Sources
Compiled from Wikipedia and the sources listed below. Text from Wikipedia is available under CC BY-SA 4.0; this entry is adapted from it.
- Wikipedia: Elasticity (economics) (CC BY-SA 4.0).
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