Elasticities
1st of April, 2006 (Last modified: 9th of March, 2008)
Elasticity is the measure of responsiveness in one varable when another changes. For example, if the price of cigarettes falls how much will the quantity demanded change? We use this analogy because elasticities streches and changes in length. As the price of a good changes, the quantity demanded changes, but by how much?
Elasticity is measured as a value between -1 and 1, though the sign is often discarded leaving only the absolute value.
| Value | Description | |
|---|---|---|
| Perfect elastic | Infinity | The percentage change in the quantity demanded is infinite |
| Elastic | >1 | The percentage change in the quantity demanded is greater than the percentage change in the variable |
| Unit elastic | =1 | The percentage change in the quantity demanded is equal to the percentage change in the variable |
| Inelastic | <1 | The percentage change in the quantity demanded is less than the percentage change in the variable |
| Perfectly inelastic | 0 | There is no change in the quantity demanded |
There are four key elasticities to examine:
- Price elasticity of demand
- Income elasticity of supply
- Cross elasticity of demand
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