Economic Development

RESEARCH
OUTPUT 4
IV. ELASTICITY CONCEPT
Gabriel T. Valida
BSA - AC1A

Ms. Angelita Mando

Instructor
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TABLE OF CONTENTS:

Subtopic Page No.

Defininition Of Elasticity……………..………………….……………… 2
Different Kinds Of Elasticity………………………………………… 57

Price Elasticity of Demand…….…………………..……….……… 78

Price Elasticity of Supply……………….….…….………………… 92

References………………………………………………….……… 113

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I. DEFINITION OF ELASTICITY

Elasticity

A general measure of the responsiveness of an economic variable in response to a change in

another economic variable

Written byCFI Team

Read Time6 minutes

What is Elasticity?

Elasticity is a general measure of the responsiveness of an economic variable in response to a

change in another economic variable. Economists utilize elasticity to gauge how variables affect
each other. The three major forms of elasticity are price elasticity of demand, cross-price
elasticity of demand, and income elasticity of demand.

Summary

 Elasticity is a general measure of the responsiveness of an economic variable in

response to a change in another economic variable.
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 The three major forms of elasticity are price elasticity of demand, cross-price
elasticity of demand, and income elasticity of demand.
 The four factors that affect price elasticity of demand are (1) availability of
substitutes, (2) if the good is a luxury or a necessity, (3) the proportion of income spent on
the good, and (4) how much time has elapsed since the time the price changed.
 If income elasticity is positive, the good is normal. If income elasticity is negative,
the good is inferior.

Price Elasticity of Demand

Price elasticity of demand demonstrates how a change in price affects the quantity demanded. It
is computed as the percentage change in quantity demanded over the percentage change in price,
and it will commonly result in a negative elasticity because of the law of demand.

The law of demand states that an increase in price reduces the quantity demanded, and it is why
demand curves are downwards sloping unless the good is a Giffen good. It is common to simply
drop the negative of the quotient.

The larger the price elasticity of demand, the more responsive quantity demanded is given a
change in price. When the price elasticity of demand is greater than one, the good is considered
to demonstrate elastic demand. When the quantity demanded drops to zero with a rise in price, it
is said that demand is perfectly elastic. If the price of an elastic good increases, there is a
corresponding quantity effect, where fewer units are sold, and therefore reducing revenue.

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The lower the price elasticity of demand, the less responsive the quantity demanded is given a
change in price. When the price elasticity of demand is less than one, the good is considered to
show inelastic demand. When the quantity demanded does not respond to a change in price, it is
said that demand is perfectly inelastic. If an inelastic good has its price increased, it will lead to
increased revenues because each unit will be sold at a higher price.

If a change in price comes with the same proportional change in the quantity demanded, it is said
that the good is unit elastic. Indicating that X% change in price results in an X% change in the
quantity demanded. Therefore, if the price elasticity of demand equals one, the good is unit
elastic. If a good shows a unit elastic demand, the quantity effect and price effect exactly offset
each other.

Calculation of Price Elasticity of Demand through the Midpoint Method

The midpoint method is a commonly used technique to calculate the percent change of price. The
primary difference is that it calculates the percentage change of quantity demanded and the price
change relative to their average.

Examples of Goods with a Price Inelastic Demand

1. Beef

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2. Gasoline
3. Salt
4. Textbooks
5. Prescription drugs
Examples of Goods with a Price Elastic Demand

1. Housing
2. Furniture
3. Cars
Factors That Affect the Price Elasticity of Demand

1. Availability of close substitutes

If consumers can substitute the good for other readily available goods that consumers regard as
similar, then the price elasticity of demand would be considered to be elastic. If consumers are
unable to substitute a good, the good would experience inelastic demand.

2. If the good is a necessity or a luxury

The price elasticity of demand is lower if the good is something the consumer needs, such as
Insulin. The price elasticity of demand tends to be higher if it is a luxury good.

3. The proportion of income spent on the good

The price elasticity of demand tends to be low when spending on a good is a small proportion of
their available income. Therefore, a change in the price of a good exerts a very little impact on
the consumer’s propensity to consume the good. Whereas, when a good represents a large chunk
of the consumer’s income, the consumer is said to possess a more elastic demand.

4. Time elapsed since a change in price

In the long term, consumers are more elastic over longer periods, as over the long term after a
price increase of a good, they will find acceptable and less costly substitutes.

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Other Demand Elasticities

1. Cross-Price Elasticity of Demand

The cross-price elasticity of demand measures how the demand for one good is impacted by a
change in the price of another good. It is calculated as the percentage change of Quantity A
divided by the percentage change in the price of the other.

If the cross-price elasticity of demand between two goods is positive, it implies that the two
goods are substitutes. Consider the following substitute goods – good A and good B. If the price
of good B rises, the demand for good A rises.

On the contrary, if the aforementioned goods were complements, when the price of good B
increases, the demand for good A should decrease. It is what is implied through the cross-price
elasticity of demand formula. It is important to note that the cross-price elasticity of demand is a
unitless measure.

2. Income Elasticity of Demand

The income elasticity of demand is defined as the measure of the percentage change of the
quantity demanded of a good in reference to changes in the consumer’s income. Calculating the
income elasticity of demand allows economists to identify normal and inferior goods, as well as
how responsive quantity demanded is to changes in income.

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If the income elasticity of demand is positive, the good is considered to be a normal good –
implying that when income increases, the quantity demanded at any given price increases.

If the income elasticity of demand is negative, the good is considered to be an inferior good –
implying that when income increases, the quantity demanded at any given price decreases.

If the income elasticity of demand is higher than 1, then the good is considered to be income
elastic – implying that demand rises faster than income. Luxury goods include international
vacations or second homes.

If the income elasticity of demand is higher than 0 but less than 1, then the good is income
inelastic – implying that demand for income-inelastic goods rises but at a slower rate than
income.

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What Is Elasticity in Finance; How Does It Work (With Example)?

By
ADAM HAYES

Updated October 17, 2024

Reviewed by
NATALYA YASHINA
Fact checked by KIRSTEN ROHRS SCHMITT

What Is Elasticity?

Elasticity is an economic concept that describes the responsiveness of one variable to changes
in another variable.

In business and economics, elasticity is usually used to describe how much demand for a
product changes as its price increases or decreases. This is referred to as price elasticity of
demand. Price elasticity of demand refers to the degree to which individuals, consumers, or
producers change their demand—or the amount supplied—in response to price or income
changes.

Price elasticity of demand is expressed as a percentage; it is the percentage change in the

quantity demanded of a good or service divided by the percentage change in the price.

KEY TAKEAWAYS

 Elasticity is an economic concept that describes the responsiveness of one variable to

changes in another variable.
 In business and economics, elasticity is usually used to describe how much demand for a
product changes as its price increases or decreases, called the price elasticity of demand.
 If demand for a good or service is relatively static (does not change) even when the price
changes, demand is said to be inelastic; food and prescription drugs are examples of
inelastic goods.

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 When a product is elastic, a change in price quickly results in a change in the quantity
demanded; examples of elastic goods include clothing and electronics.
 Cross elasticity measures the change in demand for one good given price changes in a
different, related good.

Investopedia / Jiaqi Zhou

How Elasticity Works

When a product is elastic, a change in price quickly results in a change in the quantity
demanded: There is an increase in demand when the price decreases and a decrease in demand
when the price increases. Spa days, for example, are highly elastic because they aren't a
necessary good; an increase in the price of trips to the spa will lead to a greater decline in the
demand for such services. Conversely, a decrease in the price will lead to a greater than
proportional increase in demand for spa treatments.

When a good is inelastic, there is little change in the quantity of demand even when the price of
the good changes. For example, insulin is a highly inelastic product. For people with diabetes
who need insulin, the demand is so great that price increases have very little effect on the

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quantity demanded. Price decreases also do not affect the quantity demanded; most of those
who need insulin aren't holding out for a lower price.

If the market price of an elastic good decreases, firms are likely to reduce the number of goods
or services they are willing to supply. If the market price goes up, firms are likely to increase
the number of goods they are willing to sell.

Types of Elasticity

Elasticity of Demand

The quantity demanded of a good or service depends on multiple factors, such as price, income,
and preference. Whenever there is a change in these variables, it causes a change in the quantity
demanded of the good or service.

Price elasticity of demand is an economic measure of the sensitivity of demand relative to a

change in price. It is a measure of the change in the quantity demanded due to the change in the
price of a good or service.

Income Elasticity

Income elasticity of demand refers to the sensitivity of the quantity demanded to changes in
the real income of consumers, keeping all other things constant. The formula for calculating
income elasticity of demand is the percent change in quantity demanded divided by the percent
change in income.

Cross Elasticity

The cross elasticity of demand is an economic concept that measures the responsiveness in the
quantity demanded of one good when the price for another good changes. Also called cross-
price elasticity of demand, this measurement is calculated by taking the percentage change in
the quantity demanded of one good and dividing it by the percentage change in the price of the
other good.

Price Elasticity of Supply

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Price elasticity of supply measures the responsiveness to the supply of a good or service after a
change in its market price. According to basic economic theory, the supply of a good will
increase when its price rises. Conversely, the supply of a good will decrease when its price
decreases.

Factors Affecting Demand Elasticity

There are three main factors that influence price elasticity of demand.

Availability of Substitutes

In general, the more good substitutes there are, the more elastic the demand for a good will be.
For example, if the price of a cup of coffee went up by $0.25, consumers might replace their
morning caffeinated beverage with a cup of caffeinated tea. This means that coffee is an elastic
good because a small increase in price will cause a large decrease in demand as consumers start
buying more tea than coffee.

However, if the price of caffeine itself were to go up, we would probably see little change in the
consumption of coffee or tea because there may be few good substitutes for caffeine. Most
people, in this case, might not willingly give up their morning cup of caffeine, no matter the
price. Therefore, it can be assumed that caffeine is an inelastic product. While a specific product
within an industry can be elastic due to the availability of substitutes, an entire industry itself
tends to be inelastic.

Usually, unique goods, such as diamonds, are inelastic because they have few if any substitutes.

Necessity

If a good or service is needed for survival or comfort, people will continue to pay higher prices
for it. For example, people need to use transportation, usually cars, to get to work. Therefore,
even if the price of gas doubles (or triples), people will still need to fill up their tanks.

Time

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The third influential factor is time. For instance, if the price of cigarettes goes up to $8 per pack,
consumers with very few available substitutes will most likely continue buying their daily
cigarettes. This means that tobacco is an inelastic good; the price change will not have a
significant influence on the quantity demanded (in part, due to the addictive nature of nicotine).
However, if a person who smokes cigarettes finds that they cannot afford to spend the extra $8
per day and begins to reduce their tobacco consumption over a period of time, the price of
cigarettes for that consumer becomes elastic in the long run.

The Importance of Price Elasticity in Business

Understanding whether or not the goods or services of a business are elastic is integral to the
success of the company. Companies with high elasticity ultimately compete with other
businesses on price and are required to have a high volume of sales transactions to
remain solvent. Firms that are inelastic, on the other hand, have goods and services that are
necessary for consumers and enjoy the luxury of setting higher prices.

Beyond prices, the elasticity of a good or service directly affects the customer retention rates of
a company. Businesses often strive to sell goods or services that have inelastic demand; doing
so means that customers will remain loyal and continue to purchase the good or service even in
the face of a price increase.

Examples of Elasticity

There are a number of real-world examples of elasticity that consumers interact with on a daily
basis. One interesting, modern-day example of the price elasticity of demand is the surge
pricing of the ride-sharing service, Uber. Uber uses a "surge-pricing" algorithm when there is an
above-average number of users requesting rides in the same geographic area. The company
applies a price multiplier, which allows Uber to raise prices in real time, according to demand.

The COVID-19 pandemic also impacted the price elasticity of demand for some industries.
Outbreaks of COVID-19 cases in meat processing facilities across the U.S., in addition to the
slowdown in international trade, led to a domestic meat shortage. This caused import prices to
rise 16% in May 2020, the largest increase on record since 1993.1

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The oil industry was also impacted by the COVID-19 pandemic. Although oil is generally very
inelastic, because of a historic drop in global demand for oil during March and April, along with
increased supply and a shortage of storage space, on April 20, 2020, crude petroleum traded at a
negative price in the futures market. In response to this dramatic drop in demand, OPEC+
members elected to cut production by 9.7 million barrels per day through the end of June, the
largest production cut in history.2

What Is Meant by Elasticity in Economics?

Elasticity refers to the measure of the responsiveness of quantity demanded or quantity supplied
to one of its determinants. Goods that are elastic see their demand respond rapidly to changes in
factors like price or supply. Inelastic goods, on the other hand, retain their demand even when
prices rise sharply (e.g., gasoline or food).

Are Luxury Goods Elastic?

Luxury goods often have a high price elasticity of demand because they are sensitive to price
changes. If prices rise, people quickly stop buying them and wait for prices to drop.

What Are the 4 Types of Elasticity?

The four types of elasticity are demand elasticity, income elasticity, cross elasticity, and price
elasticity.

What Is Price Elasticity?

Price elasticity measures how much the supply or demand of a product changes based on a
given change in price.

What Is the Elasticity of Demand Formula?

The elasticity of demand can be calculated by dividing the percentage change in the quantity
demanded of a good or service by the percentage change in its price.

The Bottom Line

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Elasticity is an economic concept that measures how responsive one economic variable is to
changes in another. It's often used to describe how demand for a product changes in relation to
price changes, which is known as price elasticity of demand. When demand for a good or
service is relatively static (it doesn't change), even when the price changes, demand is said to be
inelastic; If a good or service is needed for survival or comfort, people will continue to pay
higher prices for it. Caffeine and gas are examples of inelastic goods. When a product is elastic,
a change in price quickly results in a change in the quantity demanded. Clothing and electronics
are examples of elastic goods.

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Elasticity: What It Means in Economics, Formula, and Examples

By
WILL KENTON

What Is Elasticity?

Elasticity is a term used in economics to describe responsiveness in one variable to changes in

another. Typically, elasticity is used to describe how much demand for a product changes as its
price increases or decreases. This is also known as demand elasticity.

Elasticity for a good or service can vary according to the number of close substitutes available,
its relative cost, and the amount of time that has elapsed since the price change occurred. The
main types of elasticity include price, income, and cross-product subsitutions.

KEY TAKEAWAYS

 Elasticity is an important economic measure that describes how responsive one variable
is to changes in another.
 Demand elasticity is particularly for sellers of goods or services, because it reflects how
much of a good or service buyers will consume when the price increases or decreases.
 Goods with elastic demand are those whose demand fluctuates based on factors like
price, income, and other potential factors.
 Goods with inelastic demand are those whose demand stays relatively stable even when
other factors shift.

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Investopedia / Julie Bang

Understanding Elasticity

Elasticity is an important economic measure, particularly for the sellers of goods or services,
because it indicates how much of a good or service buyers consume when the price changes.

When a product is elastic, a change in price quickly results in a change in the quantity
demanded. When a good is inelastic, there is little change in the quantity of demand even with
the change of the good's price. The change that is observed for an elastic good is an increase in
demand when the price decreases and a decrease in demand when the price increases.

Companies that operate in fiercely competitive industries provide goods or services that are
elastic. This is because these companies tend to be price-takers, meaning they typically must
accept prevailing prices. When the price of a good or service reaches the point of elasticity,
sellers and buyers quickly adjust their demand for that good or service.

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Elasticity also communicates important information to consumers. If the market price of an

elastic good decreases, firms are likely to reduce the number of goods or services they are
willing to supply. If the market price goes up, firms are likely to increase the number of goods
they are willing to sell. This concept is known as elasticity of supply. It is important for
consumers who need a product and are concerned with potential scarcity.

Real-World Examples of Elastic Goods

Typically, goods that are elastic are either unnecessary goods or services or those for
which competitors offer readily available substitute goods and services. The airline industry is
elastic because it is a competitive industry. If one airline decides to increase the price of its fares,
consumers can use another airline, and the airline that increased its fares will see a decrease in
the demand for its services. Meanwhile, gasoline is an example of a relatively inelastic good
because many consumers have no choice but to buy fuel for their vehicles, regardless of the
market price.

What Is Perfectly Elastic?

When a good or service is perfectly elastic, demand for it is extremely sensitive to changes in
price. This is the inverse of extreme inelasticity, in which demand is fixed regardless of
fluctuations in price.

What Are Types of Demand Elasticity?

In general, demand elasticity refers to change in demand for a product in response to some other
variable. Typically, that variable is price. However, there are other types of demand elasticity,
as well. One might want to measure demand elasticity in response to income. This would reflect
changes in demand for a product based on how incomes fluctuate. Another indicator is demand
elasticity in respones to cross-price, which reflects changes in demand based on how prices for
competitor products move.

What Are Inelastic Goods?

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Inelastic goods tend to see little change in demand regardless of price fluctuations. Typically,
these goods are essentials or necessities that consumers need even if prices rise or incomes fall.
Examples may include staples like bread, housing, health care, and gasoline, as mentioned
above.

The Bottom Line

In general, elasticity refers to the responsiveness of one variable to changes in another. In

economics, this most frequently refers to demand elasticity, or how demand fluctuates based on
changes in other factors, such as price, income, and more. The opposite of elasticity is
inelasticity. When a good or service is inelastic, demand fluctuates very little regardless of
changes in other factors.

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Elasticity of Demand - The Economic Lowdown Podcast Series

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Econ Lowdown Podcasts and Videos icon

How elastic are rubber bands? There's more than one way to answer this question. The word
"elasticity" is commonly used to describe things that have a stretchy quality to them. You might
try to answer the question by stretching a rubber band across your finger and shooting it across
the room. To an economist, however, elasticity can have a whole other meaning. Learn more in
this episode of The Economic Lowdown.

To provide students with online questions following the episode, register your class through the
Econ Lowdown Teacher Portal.

Learn more about the Q&A Resources for Teachers and Students »

The word “elasticity” is commonly used to describe things that have a stretchy quality to them.
Rubber bands are elastic and have a stretchy quality to them. But just how elastic are rubber
bands?

One way to answer that question is by stretching a rubber band across your finger and shooting
it across the room. However, to an economist, the elasticity or stretchiness, of rubber bands can
have a whole other meaning. The economist would likely refer to how much the quantity of
rubber bands demanded changes—or how much it stretches—when the price of rubber bands
changes. Specifically, the economist would be referring to something called the price elasticity
of demand and probably wouldn’t be too focused on the elastic quality that propels a rubber
band off your finger: unless you hit the economist with the rubber band.
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The law of demand tells us that when the price of a good or service rises, consumers tend to buy
less of it. Likewise, when the price of a good or service falls, consumers tend to buy more of it.
However, the law of demand does not tell us how much more or less consumers tend to buy. For
some goods, the quantity demanded stretches a lot when the price changes: for others, not so
much.

That’s where the price elasticity of demand comes in. It is a measure of how sensitive, or
responsive, consumers are to a change in price. For any given good or service, the price
elasticity of demand measures how much the quantity demanded by consumers responds to a
change in the price of that good or service.

So a good that is price elastic has a very stretchy quantity response when there is a change in
price. In economic terms, the quantity demanded of that good changes a lot when there is a
change in the price of that good.

What do I mean by “changes a lot”? Well, if the percent change in the quantity demanded is
greater than the percent change in the price, economists label the demand for the good as elastic.

For example, if the price of a good increases by 10 percent and the quantity demanded of that
good decreases by 20 percent, that good is said to have elastic demand. The quantity demanded
has stretched a lot relative to the change in price. In such a case, consumers are considered
sensitive, or responsive, to a change in the price of that good.

On the other hand, a good that is inelastic does not have very stretchy demand. In economic
terms, the quantity demanded does not change a lot when the price changes. What do I mean by
“does not change a lot”? If the percent change in quantity demanded is less than the percent
change in price, economists label the demand for the good as inelastic.

So, if the price of a good increases by 10 percent and the quantity demanded decreases by only
5 percent, that good is said to have inelastic demand. The quantity demanded does not stretch

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much relative to the change in price. In this case, consumers are not considered very sensitive,
or responsive, to a change in the price of that good.

There’s another possible combination. If the percent change in a good’s price is offset by an
equal percent change in the quantity demanded, economists would label the demand for that
good as unit elastic. So if a price of a good increases by 20 percent and the quantity demanded
decreases by 20 percent, the demand for that good is considered unit elastic.

Pop Quiz Time! Let’s see how well you do at determining if the good is elastic or inelastic.

The price of black Nike Air Jordan shoes increases by 10% and the quantity demanded
decreases by 20%. Are black Nike Air Jordan shoes elastic or inelastic? – Elastic.

If the price of natural gas increases by 10% and the quantity demanded decreases by 5%. Is
natural gas elastic or inelastic? - Inelastic

But why is a certain brand of shoe more elastic than natural gas? Several factors can influence
whether a good or service is elastic or inelastic. Let’s discuss the four primary factors of
elasticity of demand:

The first factor of elasticity of demand is whether the good is considered a necessity or a luxury.
Necessities are more inelastic than luxuries. So, if you consider the natural gas that runs your
furnace and heats your home in the winter a necessity, you will likely keep buying
approximately the same amount even if the price goes up. You may turn the thermostat down a
little lower, but you will likely reduce the quantity you demand by a smaller percentage than the
percent increase in the price. As it turns out, other consumers react in a similar way. In
economic terms, the demand for natural gas in the winter tends to be relatively price inelastic.

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But what about cowboy boots? For me, cowboy boots are not a necessity. So, if the price of
cowboy boots were to rise, the quantity I demand would fall. In fact, the quantity I demand
would fall a lot. If others behaved similarly, we might assume the demand for cowboy boots is
relatively price elastic. When the price goes up, the quantity demanded goes down a lot.

A second factor is the portion of your income you give up to buy something. Anything you
purchase takes a portion of your income. It may be a small portion or a large portion.

Say that for dinner you regularly eat steak, followed by an after dinner mint. While you
consider both an essential part of a good meal, one important difference is the price relative to
your grocery budget. Steak tends to be much more expensive than mints.

In fact, if the price of steak and mints both doubled in price, you’d likely continue to buy mints,
but perhaps choose something else as your main course. The demand for steak tends to be more
price elastic than the demand for after dinner mints.

The third factor of price elasticity is the availability of close substitutes. A good with few close
substitutes tends to be more inelastic than those with many substitutes. Why?

Well, when the price of that good rises, you may start looking for substitutes to purchase to
avoid paying the higher price. The more substitutes there are, the less likely you—and other
people—are to buy the good at the higher price. When thinking about price changes, it’s
important to distinguish between a change in the price of a specific product and a change in the
price of a product category.

For example, consider shoes in general, a product category. If the price of shoes rises—that is,
all shoes cost more—there are few substitutes for shoes so you, and most other consumers—
will likely still buy shoes in spite of the price increase. Using economic terms, consumers will

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not be very sensitive, or responsive, to price changes—so the demand for shoes will likely be
price inelastic. It will stay relatively the same.

However, consider the price of a specific good within the category—say black Nike Air Jordan
basketball shoes. For example imagine the price of black Nike Air Jordan basketball shoes were
to increase. Because there are many substitutes—perhaps 60 or more—you will likely be more
sensitive, or responsive, to a change in the price of that specific shoe. In economic terms,
consumers will likely be very sensitive, or responsive, to a change in the price of this specific
good. So, demand for this specific shoe will likely be more price elastic than for shoes as a
category.

A fourth factor of price elasticity is time. All goods tend to be more elastic in the long-run than
in the short run. Why?

Time allows people to find substitutes. So, if the price of gasoline were to increase, in the short-
run you would likely decrease the quantity you demand, but only slightly. You would still likely
have the same commute to work or school and the same car as you had before the price increase.
Realistically, it could be hard to quickly reduce the quantity of gas you use.

However, as time passed, if gas prices stayed high, you might find a car pool or buy a more
fuel-efficient car. So, while it might be difficult to adjust consumption of certain goods
immediately when prices increase, with time, you —and many others—are likely to find other
options.

Now let’s see if you can identify whether a good is likely to be elastic or inelastic and which
factor of elasticity is likely to have the biggest effect.

Frizzy Cola, a type of carbonated beverage. – Elastic demand because there are many
substitutes for Frizzy Cola—a specific brand of soda pop.

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An expensive meal at a restaurant. – This could be elastic demand because of the portion of
your income you give up.

Auto Repair – Inelastic demand— because it could be a necessity if you rely on your
automobile to get around.

So, how did you do? Elasticity can sometimes be tricky to understand. But there are some
people who might find it especially important to understand the elasticity of demand.

Can you guess who they are?

Business people and policymakers. Knowing whether a good is likely to be price elastic or price
inelastic could help guide business decisions about price changes and government decisions
about taxes. Here’s how.

If you owned a business, it would be useful to know how a change in the price of the good you
sell would influence the amount of money you bring in, which is your revenue. Your revenue is
calculated by multiplying the amount of a good sold by the price charged for that good.

Imagine you own a firm that sells widgets. If demand for widgets is relatively price elastic and
you decide to increase the price by 10 percent, you could expect the quantity you sell to
decrease by more than 10 percent, which means your revenue would decrease. In this case, by
increasing your price, you’d bring in less money. But if demand for widgets is relatively price
inelastic, and you decide to increase the price by 10 percent, you could expect the quantity
demanded to fall—due to the law of demand. But since the demand is relatively inelastic, the
quantity demanded would fall by less than 10 percent, which means your revenue would
increase. By increasing the price, you’d bring in more money.

For policymakers, understanding the price elasticity of demand may help them consider
consequences when designing tax policy. For example, consider cigarettes—a good that state
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ELASTICITY CONCEPT

and local governments frequently tax. Demand for cigarettes tends to be price inelastic. When
the price of an inelastic good increases, consumers generally don’t reduce their consumption by
very much, relatively speaking.

When government increases the tax on cigarettes, the relative increase in price is greater than
the decrease in quantity sold, so tax revenues increase. However, if a good is price elastic, an
increase in the tax on that good would likely reduce the quantity of the good consumers demand
by a greater percentage than the price increase.

Tax revenues would likely fall.

Well, snap! We’re out of time. I hope you feel a little stretched by this experience. Thanks for
listening.

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elasticity

elasticity, in economics, a measure of the responsiveness of one economic variable to another.

A variable y (e.g., the demand for a particular good) is elastic with respect to another
variable x (e.g., the price of the good) if y is very responsive to changes in x; in contrast, y is
inelastic with respect to x if y responds very little (or not at all) to changes in x.

Technically, the elasticity of y with respect to x is calculated as the ratio of the percentage
change in the quantity of y to the percentage change in the quantity of x. In algebraic form,
elasticity (E) is defined as E = %Δy/%Δx. Y is elastic with respect to x if E is greater than 1,
inelastic with respect to x if E is less than 1, and “unit elastic” with respect to x if E is equal to
1.

Elasticity is a very important concept in economics. Several types of elasticities that are
frequently used to describe well-known economic variables have acquired their own special
names over time. These include, but are not limited to, the price elasticity of supply and
demand (the elasticity of supply or demand with respect to price), the income elasticity of
demand, the cross-price elasticity (the elasticity of the price of a good with respect to the price
of another good), the elasticity of substitution between different factors of production (for
example, between capital and labour), and the elasticity of intertemporal substitution (for
example, the elasticity of consumption in the future relative to consumption in the present).

supply and demand

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supply and demand, in economics, relationship between the quantity of a commodity that
producers wish to sell at various prices and the quantity that consumers wish to buy. It is the
main model of price determination used in economic theory. The price of a commodity is
determined by the interaction of supply and demand in a market. The resulting price is
referred to as the equilibrium price and represents an agreement between producers and
consumers of the good. In equilibrium the quantity of a good supplied by producers equals the
quantity demanded by consumers.

Demand curve

The quantity of a commodity demanded depends on the price of that commodity and
potentially on many other factors, such as the prices of other commodities, the incomes and
preferences of consumers, and seasonal effects. In basic economic analysis, all factors except
the price of the commodity are often held constant; the analysis then involves examining the
relationship between various price levels and the maximum quantity that would potentially be
purchased by consumers at each of those prices. The price-quantity combinations may be
plotted on a curve, known as a demand curve, with price represented on the vertical axis and
quantity represented on the horizontal axis. A demand curve is almost always downward-
sloping, reflecting the willingness of consumers to purchase more of the commodity at lower
price levels. Any change in non-price factors would cause a shift in the demand curve,
whereas changes in the price of the commodity can be traced along a fixed demand curve.

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Supply curve

The quantity of a commodity that is supplied in the market depends not only on the price
obtainable for the commodity but also on potentially many other factors, such as the prices of
substitute products, the production technology, and the availability and cost of labour and
other factors of production. In basic economic analysis, analyzing supply involves looking at
the relationship between various prices and the quantity potentially offered by producers at
each price, again holding constant all other factors that could influence the price. Those price-
quantity combinations may be plotted on a curve, known as a supply curve, with price
represented on the vertical axis and quantity represented on the horizontal axis. A supply
curve is usually upward-sloping, reflecting the willingness of producers to sell more of the
commodity they produce in a market with higher prices. Any change in non-price factors
would cause a shift in the supply curve, whereas changes in the price of the commodity can
be traced along a fixed supply curve.

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Market equilibrium, or balance between supply and demand

Supply and demand are equated in a free market through the price mechanism. If buyers wish
to purchase more of a good than is available at the prevailing price, they will tend to bid the
price up. If they wish to purchase less than is available at the prevailing price, suppliers will
bid prices down. The price mechanism thus determines what quantities of goods are to be
produced. The price mechanism also determines which goods are to be produced, how the
goods are to be produced, and who will get the goods—i.e., how the goods will be distributed.
Goods so produced and distributed may be consumer items, services, labour, or other salable
commodities. In each case, an increase in demand will lead to the price being bid up, which
will induce producers to supply more; a decrease in demand will lead to the price being bid
down, which will induce producers to supply less. The price system thus provides a simple
scale by which competing demands may be weighed by every consumer or producer.

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The tendency to move toward the equilibrium price is known as the market mechanism, and
the resulting balance between supply and demand is called a market equilibrium.

As the price of a good rises, the quantity offered usually increases, and the willingness of
consumers to buy the good normally declines, but those changes are not necessarily
proportional. The measure of the responsiveness of supply and demand to changes in price is
called the price elasticity of supply or demand, calculated as the ratio of the percentage
change in quantity supplied or demanded to the percentage change in price. Thus, if the price
of a commodity decreases by 10 percent and sales of the commodity consequently increase by
20 percent, then the price elasticity of demand for that commodity is said to be 2.

In algebraic form, elasticity (E) is defined as E = %Δy/%Δx; y is elastic with respect

to x if E is greater than 1, inelastic with respect to x if E is less than 1, and “unit elastic” with
respect to x if E is equal to 1. Several other types of elasticities are frequently used to describe
well-known economic variables. These include, but are not limited to, the income elasticity of
demand, the cross-price elasticity (the elasticity of the price of a good with respect to the price
of another good), the elasticity of substitution between different factors of production (for
example, between capital and labour), and the elasticity of intertemporal substitution (for
example, the elasticity of consumption in the future relative to consumption in the present).

Several other types of elasticities that are frequently used to describe well-known economic
variables have acquired their own special names over time. These include, but are not limited
to, the income elasticity of demand, the cross-price elasticity (the elasticity of the price of a
good with respect to the price of another good), the elasticity of substitution between different
factors of production (for example, between capital and labour), and the elasticity of
intertemporal substitution (for example, the elasticity of consumption in the future relative to
consumption in the present).

The demand for products that have readily available substitutes is likely to be elastic, which
means that it will be more responsive to changes in the price of the product. That is because
consumers can easily replace the good with another if its price rises. The demand for a
product may be inelastic if there are no close substitutes and if expenditures on the product
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constitute only a small part of the consumer’s income. Firms faced with relatively inelastic
demands for their products may increase their total revenue by raising prices; those facing
elastic demands cannot.

Supply-and-demand analysis may be applied to markets for final goods and services or to
markets for labour, capital, and other factors of production. It can be applied at the level of
the firm or the industry or at the aggregate level for the entire economy.

free market

free market, an unregulated system of economic exchange, in which taxes, quality

controls, quotas, tariffs, and other forms of centralized economic interventions by
government either do not exist or are minimal. As the free market represents a benchmark
that does not actually exist, modern societies can only approach or approximate this ideal
of efficient resource allocation and can be described along a spectrum ranging from low to
high amounts of regulation.

Many economists consider resource allocation in a free market to be Pareto-efficient,

where no one can be made better off without making other individuals worse off, given
certain conditions (like the absence of externalities, or side effects, and of informational
asymmetries, or disparities of knowledge, among others). Moreover, according to this
theory, through the invisible-hand mechanism of self-regulating behaviour, society
benefits by having self-interested actors make free economic decisions that benefit
themselves. Some ethicists have argued that the efficiency of free markets depends on
several moral parameters as scope conditions, such as fair play, prudence, self-
restraint, competition among equal parties, and cooperation.

Critics of the free market system tend to argue that certain market failures require
government intervention. First, prices may not fully reflect the costs or benefits of certain
goods or services, especially costs to the environment. Public goods are often
underinvested or exploited to the detriment of others or future generations, unless such
exploitation is prohibited through government regulation (see tragedy of the commons).

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Second, a free market may tempt competitors to collude, which makes antitrust
legislation necessary. Antitrust and similar regulations are especially necessary in cases
where certain market actors, such as companies, have acquired enormous market power.
Third, transaction costs may mean that some exchanges are best performed in a hierarchy
rather than in spot markets (where payment and delivery are made on the spot). Most
importantly, Pareto-optimal resource allocation in a free market may violate principles of
distributive justice and fairness and may thus necessitate some government action.

In response to these critiques, economists Ronald Coase, Milton Friedman, Ludwig von
Mises, and Friedrich A. Hayek, among others, have argued for the robustness of markets
because they can adjust to or internalize supposed market failures in many situations. For
instance, many goods traditionally conceptualized as public goods requiring government
provision have been shown to be open to free market contracting. Libertarians are strong
defenders of the idea that a system of free markets provides the best economic system.

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In economics, elasticity measures the responsiveness of one economic variable to a change in

another.[1] For example, if the price elasticity of the demand of a good is −2, then a 10%
increase in price will cause the quantity demanded to fall by 20%. Elasticity in economics
provides an understanding of changes in the behavior of the buyers and sellers with price
changes. There are two types of elasticity for demand and supply, one is inelastic demand and
supply and the other one is elastic demand and supply.[2]

The concept of price elasticity was first cited in an informal form in the book Principles of
Economics published by the author Alfred Marshall in 1890.[3] Subsequently, a major study of
the price elasticity of supply and the price elasticity of demand for US products was undertaken
by Joshua Levy and Trevor Pollock in the late 1960s.[4]

Elasticity is an important concept in neoclassical economic theory, and enables in the

understanding of various economic concepts, such as the incidence of indirect taxation, marginal
concepts relating to the theory of the firm, distribution of wealth, and different types of
goods relating to the theory of consumer choice. An understanding of elasticity is also important
when discussing welfare distribution, in particular consumer surplus, producer surplus,
or government surplus.[5]

Elasticity is present throughout many economic theories, with the concept of elasticity appearing
in several main indicators. These include price elasticity of demand, price elasticity of
supply, income elasticity of demand, elasticity of substitution between factors of
production, cross-price elasticity of demand, and elasticity of intertemporal substitution.[6]

In differential calculus, elasticity is a tool for measuring the responsiveness of one variable to
changes in another causative variable. 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 and all other conditions remain the same. For example, the factors
that determine consumers' choice of goods mentioned in consumer theory include the price of the
goods, the consumer's disposable budget for such goods, and the substitutes of the goods.[3]

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Within microeconomics, elasticity and slope are closely linked. For price elasticity, the
relationship between the two variables on the x-axis and y-axis can be obtained by analyzing the
linear slope of the demand or supply curve or the tangent to a point on the curve. When the
tangent of the straight line or curve is steeper, the price elasticity (demand or supply) is smaller;
when the tangent of the straight line or curve is flatter, the price elasticity (demand or supply) is
higher.[7]

Elasticity is a unitless ratio, independent of the type of quantities being varied.

An elastic variable (with an absolute elasticity value greater than 1) responds more than
proportionally to changes in other variables. A unit elastic variable (with an absolute elasticity
value equal to 1) responds proportionally to changes in other variables. In contrast,
an inelastic variable (with an absolute elasticity value less than 1) 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, for the suppliers of the goods, 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. In contrast, a raise from an initially high price might bring on a less-than-
proportionate rise in quantity supplied.[8]

In empirical work, an elasticity is the estimated coefficient in a linear regression equation 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.[9]

Definition

[edit]

Elasticity is the measure of the sensitivity of one variable to another.[10] A highly elastic
variable will respond more dramatically to changes in the variable it is dependent on. The x-
elasticity of y measures the fractional response of y to a fraction change in x, which can be
written as

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x-elasticity of y:

In economics, the common elasticities (price elasticity of demand, price elasticity of supply, and
cross-price elasticity) all have the same form:

P-elasticity of Q: if continuous, or if discrete.

elastic Q changes more than P

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unit elastic Q changes like P

inelastic Q changes less than P

Suppose price rises by 1%. If the elasticity of supply is 0.5, quantity rises by .5%; if it is 1,
quantity rises by 1%; if it is 2, quantity rises by 2%.

Special cases:

Perfectly

elastic: ; quantity has an infinite response to even a small price change.

Perfectly inelastic: ; quantity does not respond at all to a price change.

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Price elasticity of demand measures sensitivity of demand to price. Thus, it measures the
percentage change in demand in response to a change in price.[11] More precisely, it gives the
percentage change in quantity demanded in response to a one per cent change in price (ceteris
paribus, i.e. holding constant all the other determinants of demand, such as income). Expressing
this mathematically, price elasticity of demand is calculated by dividing the percentage change in
the quantity demanded by the percentage change in the price.[12]

If price elasticity of demand is calculated to be less than 1, the good is said to be inelastic. An
inelastic good will respond less than proportionally to a change in price; for example, a price
increase of 40% that results in a decrease in demand of 10%.

Goods that are inelastic often have at least one of the following characteristics:

 Few, if any, available substitutes (e.g. precious metals)

 Essential goods (e.g. petrol)
 Addictive goods (e.g. alcohol, cigarettes)
 Bought infrequently or a small percentage of income (e.g. salt)

For goods with a high elasticity value, consumers will be more sensitive to price changes. For the
average consumer, an increase in price of an inessential good with many available substitutes
will often result in that consumer not purchasing the good at all, or purchasing one of the
substitutes instead.[13]

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Example: In the above graphical representation which shows an effect of prices on demand. If
the price of the pizza is $20 at which the quantity demanded is 5, if there is an increase in price
of pizza to $30 it will lead to decrease in quantity demanded to 3 which shows that small changes
in the price of pizza lead to higher changes in quantity demanded.

Price elasticity of supply

Main article: Price elasticity of supply

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Calculating the 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.[14] 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 supply elasticity is zero, the supply of a good supplied is "totally
inelastic", and the quantity supplied is fixed. It is calculated by dividing the percentage change in
quantity supplied by the percentage change in price.[15]

The supply is said to be inelastic when the change in the prices leads to small changes in the
quantity of supply. Whereas the elastic supply means the changes in prices causes higher
changes in the quantity supplied.

Income elasticity of demand

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Engels curves showing income elasticity of demand (YED) of normal

goods (comprising luxury (red) and necessity goods (yellow)), perfectly
inelastic (green) and inferior goods (blue)
Main article: Income elasticity of demand

Income elasticity of demand is a measure used to show the responsiveness of the quantity
demanded of a good or service to a change in the consumer income. Mathematically, this is
calculated by dividing the percentage change in the quantity demanded by the percentage change
in income.[16] Generally, a higher income will increase quantity demanded as consumers will be
willing to spend more.

Cross-price elasticity of demand

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Formula for cross-price elasticity

Cross-price elasticity of demand (or cross elasticity of demand) measures the sensitivity between
the quantity demanded in one good when there is a change in the price of another good.[17] As a
common elasticity, it follows a similar formula to price elasticity of demand. Thus, to calculate it
the percentage change in the quantity of the first good is divided by the percentage change in
price in the second good.[17] The related goods that may be used to determine sensitivity can
be complements or substitutes.[11] Finding a high-cross price elasticity between the goods may
indicate that they are more likely substitutes and may have similar characteristics.[18] If cross-
price elasticity is negative, the goods are likely to be complements.

Real-world examples of cross-price elasticity:[19]

Elasticity
of scale Product Under Investigation Comparison Product Price Elasticity
[edit] US Domestic Tuna Imported Tuna 0.45

US Domestic Tuna Bread -0.33

US Domestic Tuna Ground Meat 0.3

Beer Wine 0.2

Beer Soft Drinks 0.3

Transit Automobiles 0.85

Transportation Recreation -0.05

Food Recreation 0.15

Clothing Food -0.18

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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.[20] 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

Determinants of elasticity

There are various factors that may affect elasticity, and these factors differ for the types of
elasticity.

Factors affecting price elasticity of demand

Availability of substitutes

If a product has various available substitutes that exist in the market, it is likely that it would be
elastic.[25] If a product has a competitive product at a cheaper price in the market in which it
shares many characteristics with, it is likely that consumers would deviate to the cheaper
substitute. Thus, if many substitutions existed in the market, a consumer would have more
choices and the elasticity of demand would be higher (elastic). In contrast, if there were few
substitutions that existed in the market, consumers will have fewer choices and little to no
available substitutes which means elasticity of demand would be lower (inelastic).[25]

Product is necessity or luxury

[edit]

If a product is a necessity to the survival or daily life of a consumer, it is likely to be

inelastic.[26] This is due to the fact that if a product is so intrinsically important to the daily life
of a consumer, a change in price is not likely to affect its demand.[1]

Time elapsed since price changed

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[edit]

If the price of a product is increasing and it has little available substitutes, it is likely that the
consumer will still continue to pay this higher price.[1] The fact that the consumer needs the
good in the short-run, means that he is likely to continue this action regardless in the long-run.
This shows inelasticity of demand, because even if there is a huge increase of a product's price,
there is no reduction of demand. However, if the consumer could not afford the new price of the
product, they would likely have to learn to live without it, making the price elastic in the long-
run.[25]

Percentage Income spent on the good

[edit]

When the consumer spends a considerable portion of their income on goods, it shows elastic
demand. This indicates that a change in the price of the goods will have a low impact on the
consumer's marginal consumption propensity. If the income spent by the consumer on the goods
is in a small proportion of their total income which means the price elasticity of demand is low in
such case.[27]

Alternatively, we may also determine the factors affecting demand elasticity by considering three
"Intuitive factors. Firstly, we may consider that there is different nature of elasticity when
weighting a "brand" of a product or a "category" of a product, a particular brand of product is
subject to elasticity as other brand may replace it, while a "category" of a product may not be
easily replaced by other category of products. Secondly, like a complementary product, there are
some commodities that is inelastic as buyer may have proceeding commitment to purchase it in
the future, such as vehicle spare part. Thirdly, consumer mostly pay attention to product which
cost a majority of share of their spending, hence any change of price in this product or services
would be immediately affect consumer demand, hence this kind of product is elastic, while a
product which is not part of consumer majority of purchase is inelastic due to "low involvement
to products" effect.[28]

Factors affecting price elasticity of supply

[edit]

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Availability of scarce resources in the market

[edit]

It is one factor affecting the price elasticity of any industry if the industry uses scarce
resources to produce goods. If there is an increase in demand for the goods, the company will not
be able to meet the demand because of the availability of resources. Thus, it will increase the
prices of the resources, leading to a corresponding increase in the price of the producer
goods.[29] For example, Petrol is a natural resource, and thus it is scarce. If the demand for
Petrol increases as there is a scarcity of Petrol, it will lead to an increase in petrol prices.

Number of competitors in the industry

[edit]

It means that if the number of competitors is producing the same goods, there is an easy supply
of the goods and thus supply is more inelastic with the increase in competitors.[30]

Others

[edit]

Like Price Elasticity of Demand, time also affects Price Elasticity of Supply. Though, there are
other varying factors that affect this too, such as: capacity, availability of raw materials,
flexibility, and the number of competitors in the market. Though, the time horizon is arguably
the most influential detriment to price elasticity of supply.[15]

The longer the time horizon, the easier it is for commodity buyers to choose alternative products
(substitutes). Further, as the time for suppliers to respond to price changes increases, a given
price change will have a more significant impact on supply. However, suppliers can also hire
more labour overtime, raise more funds, build more new factories to expand production capacity,
and ultimately increase supply. In general, long-term supply is more elastic than short-term
supply because producers need some time to adjust their ability to adapt to changes in
demand.[31]

Applications

[edit]
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The concept of elasticity has an extensive range of applications in economics. In particular, an

understanding of elasticity is fundamental in understanding the response of supply and
demand in a market.[12]

Elasticity is also an important concept for enterprises and governments. For enterprises, elasticity
is relevant in the calculation of the fluctuation of commodity prices, and its relation to income.

For enterprise, the concept of elasticity also can be applied for pricing strategy. At one hand a
businessman has to calculate as if reducing price will necessarily increasing the demand of their
products, or will it not be necessary so and resolving a lost for the company[32] At the other
hand, enterprise have to consider whether Increasing price and cutting production quantity led to
greater revenue.[33] To answer that, it is suggested that if the demand of that product is elastic
enough, it is profitable for enterprises to cut price and let the demand to increase over
time.[34] But in other hand if the price is inelastic, it is profitable to cut the quantity of
production and let the price to rise, because as the product is inelastic enough, so consumer have
no alternative to purchase other type of product or services to replace it. Though it is clear that
the enterprise should not let their product price to pass by that inelasticity threshold, if so, then
the product will be subject to price elasticity and be affected by declining demand over time.[33]

For governments, the concept is important for the implementation of taxation. When a
government wants to increase taxes on goods, it can use elasticity to judge whether increasing
the tax rate will be beneficial. Often, the demand for goods will be significantly reduced when a
government increases taxes on them. Whilst a tax increase on inelastic goods will not impact
their demand, it may affect goods that are elastic. Aside from taxation, elasticity can also assist
in analysing the need for government intervention.

Additionally, for essential goods, the government must ensure that they are available to most
consumers. Through setting price ceilings and floors, the government is intervening by ensuring
that these goods are reasonably available.

As stated by British political economist David Ricardo, luxury goods taxes have certain
advantages over necessities taxes. They are usually paid from income and, therefore, will not

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reduce the country's production capital. For instance, when the price of wine products rises due
to increased taxes, consumers can give up drinking wine.[35]

Other common uses of elasticity include:

 Analysis of incidence of the tax burden and other government policies. See Tax incidence.
 Income elasticity of demand, used as an indicator of industry health, future consumption
patterns, and a guide to firms' investment decisions. See Income elasticity of demand.
 Effect of international trade and terms of trade effects. See Marshall–Lerner
condition and Singer–Prebisch 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.

Elasticity and Its Expansion

By Morgan Rose

As this semester closed, I asked several colleagues who taught introductory economics courses to
name the most difficult topics to teach to first-time economics students. There was some
variation in their answers, but one concept was mentioned far more often than any other—
elasticity. In this Teacher’s Corner, we will define what elasticity means in economics, explain
how one particular type of elasticity is calculated, and discuss why the concept is critical to
economic agents trying to maximize their revenue. We will also see that although the precise
definitions and terminology surrounding elasticity are just a little more than a century old, earlier
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economists had an understanding of both the idea behind elasticity and its relevance, especially
with regard to taxation.

Elasticity in Economic Decisions

Economics is all about determining what choices concerning resources, rules, time, and effort
will lead to the best outcomes. Knowing how some economic factors will react to a decision
made regarding other economic factors is fundamental to figuring out what the best decisions are.
For instance, in order for a firm’s manager to know whether he should lower the price on the
firm’s product, he needs to have an idea of how many new customers will be attracted by the
lower price. If the firm sells several products, he will also need to consider how the change in
one product’s price will affect the sales of the other products. A government considering an
increase in tax rates needs to know how much the higher rates will shrink the tax base in order to
determine whether the amount of revenue generated will rise or fall.

These considerations and countless others you might imagine all involve how one change leads
to other changes. In economics, an elasticity is a measurement of the responsiveness of one
variable to a change in another variable. There are many different types of elasticities
distinguished by the pair of variables that each one considers, but at their core they are all simply
comparisons of how one thing changes in response to changes in another.

Because all elasticities perform the same function, just with different variables, focusing on one
type allows us to reduce clutter and confusion while exploring how elasticities work and why
they are useful. In what follows below, we will emphasize the type of elasticity relevant to the
first example given above, in which a manager wants to know how the quantity demanded of a
product will change in response to a change in price. This type of elasticity, called the “price
elasticity of demand,” is probably the most intuitive and readily accessible type, and so serves as
the best introduction into the subject.

Elasticity and the Market for Lemonade

To illustrate the importance of a price elasticity of demand, consider a young boy, Henry, who
sells lemonade on Saturdays for 50 cents a glass from a stand in his front yard in Austin, Texas.
Suppose that on any given Saturday he sells ten glasses, so that his total revenue is $0.50 × 10 =
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$5.00. (For simplicity, we’ll assume that Henry’s mother buys all of the ingredients and gives
them to him for free, so his costs are zero and do not change with the number of glasses he sells.)

Henry wonders whether he would have higher or lower total revenue if he lowered his price for a
glass of lemonade. A lower price would mean less revenue per glass, but might also mean he
would attract more customers and sell more glasses. The size of his total revenue after lowering
his price would depend on whether the rise in customers grew proportionately more or less than
the fall in price.

Let’s say that Henry lowers his price to 40 cents, a 20% fall from the original price. If Henry still
sells ten glasses a day, then his total revenue will be $0.40 × 10 = $4.00, also a 20% fall. But
when prices fall, sales generally increase, offsetting some of the decrease in revenue. If Henry’s
sales increase proportionately more than his price decreases, then the higher sales will more than
offset the price reduction, and his revenue will actually increase.

For example, if in response the number of glasses he sells rises, but only by 10% to 11 glasses
every Saturday, then his total revenue will be $0.40 × 11 = $4.40. If, on the other hand, the
number of glasses he sells rises 30% to 13 glasses every Saturday, his total revenue will be $0.40
× 13 = $5.20. If the growth in quantity demanded rises proportionately more than the fall in price,
then Henry will generate higher total revenue if he lowers his price, as shown in the first case. If
the growth in quantity demanded rises proportionately less than the fall in price, as in the second
case, then Henry will generate lower total revenue if he lowers his price.1 Knowing how much
quantity demanded changes (proportionately, not in absolute terms) in response to a change in
price is therefore critical to Henry’s decisions. It can determine whether he will raise, lower, or
keep steady his price in his attempt to generate more revenue.

The biography of Alfred Marshall in the Concise Encyclopedia of Economics notes that “To
Marshall also goes credit for the concept of price-elasticity of demand, which quantifies
buyers’ sensitivity to price.” As we will discuss below, Marshall was the first to quantify that
sensitivity, but not the first to be aware of its practical importance.

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The definition of a price elasticity of demand was first explicitly laid out by Alfred Marshall in
his classic textbook Principles of Economics (1920, first pub. 1890). In the second paragraph
of Book III, Chapter 4, he wrote that “The elasticity (or responsiveness) of demand in a market
is great or small according as the amount demanded increases much or little for a given fall in
price, and diminishes much or little for a given rise in price (italics in the original).” This
definition is not very precise, but Marshall provided a more mathematical definition in a footnote
to the above passage, footnote 69:

We may say that the elasticity of demand is one, if a small fall in price will cause an equal
proportionate increase in the amount demanded: or as we may say roughly, if a fall of one per
cent. in price will increase the sales by one per cent.; that it is two or a half, if a fall of one per
cent. in price makes an increase of two or one half per cent. respectively in the amount
demanded; and so on. (This statement is rough; because 98 does not bear exactly the same
proportion to 100 that 100 does to 102.) (The parenthetical statement is in the original.)

This lays out the procedure for calculating the price elasticity of demand for Henry’s lemonade.
Let’s take the first case given above. First, we need the percentage change in price, which was
given as a 20% fall. Next, we need the percentage change in quantity demanded, which in the
first set of numbers was given as a 30% rise. The price elasticity of demand is the ratio of the
percentage change in quantity demanded to the percentage change in price, which in this case is
30% / 20% = 1.5. In the second case, in response to a 20% fall in price, quantity demanded rises
only 10%, so the price elasticity of demand equals 10% / 20% = 0.5.2 Because elasticities are
ratios of percentages, they are “unit-free,” not denominated in dollars or in a specific good such
as glasses of lemonade. This allows the elasticities of different markets involving different
products to be compared to one another meaningfully.

The above calculations lead us directly to some terminology used in conjunction with elasticities
(these terms apply to all types of elasticities, not just price elasticities of demand):

. When the price elasticity of demand is greater than 1, the change in quantity demanded is
proportionately more than the change in price. Demand in this case is said to
be elastic (you can think of quantity demanded as having “stretched” more than price).
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. When the price elasticity of demand is less than 1, the change in quantity demanded is
proportionately less than the change in price. Demand in this case is said to
be inelastic (quantity demanded “stretched” less than price).

With these terms in mind, you can form an intuition linking elasticity to Henry’s original concern,
how a lower price would affect his total revenue:

. If demand is elastic (the first case, where elasticity = 1.5), then a small drop in price
results in a proportionately bigger rise in sales, and his revenue will grow (from $5.00 to
$5.20). Conversely, a small rise in price will cause a proportionately bigger drop in sales,
and his revenue will fall.
. If demand is inelastic (the second case, where elasticity = 0.5), then a small drop in price
results in a proportionately smaller rise in sales, and his revenue will fall (from $5.00 to
$4.40). Conversely, a small rise in price will cause a proportionately smaller drop in sales,
and his revenue will rise.

Some Caveats

The above section illustrated how the concept of elasticity can be extremely important to
economic agents by clarifying the relationships between changes in economically significant
variables. However, for elasticities to be useful, it is important to keep in mind exactly what they
do and do not measure. The price elasticity of demand for Henry’s lemonade applies to the
demand for Henry’s lemonade. It cannot be assumed to apply to the demand for lemonade in
general or even to lemonade sold by other young Texan boys. This is because any estimate of
price elasticity of demand, or any other type of elasticity, is determined in part by the
idiosyncrasies of the particular market from which the information is derived. Additionally, those
idiosyncrasies must be stable for a given elasticity to be used over time. Ludwig von Mises, who
was critical of the shift toward more quantitative analysis in economics he saw in his lifetime,
used this limitation of an elasticity estimate as part of his critique. He wrote in Chapter
2, paragraph 107 of Human Action (1996, first pub. 1949) that

If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a
definite time was followed by a fall of 8 per cent in the price, he does not establish anything
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about what happened or may happen with a change in the supply of potatoes in another country
or at another time. He has not “measured” the “elasticity of demand” of potatoes. He has
established a unique and individual historical fact.

To the extent that the market for lemonade in Austin differs from that for lemonade generally, or
that the market for lemonade from one boy’s stand differs from lemonade from another boy’s
stand, or any number of other differences, the price elasticity of demand for Henry’s lemonade
may not apply to other lemonade. One way of expressing this critique is to note that there is no
way to theoretically predict elasticity—it must be calculated for each case at hand, and the
elasticity from one case may bear little or no relation to the elasticity in another.

In Book III, Chapter 4, paragraphs 4-5 of Principles of Economics, Marshall described how
elasticity varies as you move along a demand curve. His description only holds for certain
kinds of demand curves, but the larger point, that the elasticity in a market generally changes
as the price changes, remains valid.

Another thing that must be remembered about elasticity is that even in the case of an elasticity
estimated for a very specific market like that for Henry’s lemonade, a single elasticity will not
hold for that market at all times. In our example, the price elasticity of demand for Henry’s
lemonade is likely to vary if the analysis begins at a different price level. Except in a few special
cases, quantity demanded will still change in response to a change in price, but the relative sizes
of the changes will be different. As a result, it is important to know not just to what markets a
given estimate of elasticity applies, but also whether the price levels in those markets have
changed significantly from when the estimates were made.

Elasticity and It’s Evolution in Tax Analysis

Marshall was the first economist to explicitly define price elasticity of demand and formalize the
mathematical derivation of elasticities, but he was not the first to consider the relationship
between changes in prices and changes in quantities demanded. Earlier writers displayed an
understanding of how the elasticities of different goods affect the revenues related to those goods

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even without the precise vocabulary and mathematical framework Marshall later provided. One
area in which they often employed the idea was tax policy.

That there should have been a conceptual link in the minds of classical economists between tax
policy and what we now call price elasticity of demand is perhaps not very surprising. During the
eighteenth and nineteenth centuries, European governments raised much of their revenue from
taxes on foreign and domestic goods, taxes that raised the final prices of the goods. For a
government seeking to raise large amounts of revenue in this manner, an understanding of the
idea behind price elasticities of demand was crucial in determining the effects of imposing,
removing, raising, or lowering the taxes on specific commodities. Classical economists
commenting on the tax policies of governments might naturally consider the price elasticities of
different goods when drawing conclusions about what goods should be taxed and at what rates.

In Book V, Chapter 2, paragraphs 178 and 179 An Inquiry into the Nature and Causes of the
Wealth of Nations (1904, first pub. 1776), Adam Smith remarked on the possibility that lower
taxes can raise tax revenue by lowering the price and encouraging the consumption of the taxed
good. He noted that “High taxes, sometimes by diminishing the consumption of the taxed
commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to
government than what might be drawn from more moderate taxes. When the diminution of
revenue is the effect of the diminution of consumption there can be but one remedy, and that is
the lowering of the tax.” Smith seems to have understood that some goods’ demands are more
price elastic than others’, but did not appear to consider it a major point or something worth
explaining at length because he did not return to the idea, but spent considerable time discussing
the means and impact of smuggling in Britain.

Some related but distinct definitions of necessities and luxuries can be compared by
reading Book V, Chapter 2, paragraph 148 of Adam Smith’s An Inquiry into the Nature and
Causes of the Wealth of Nations (1904, first pub. 1776), chapter 3, paragraphs 30-33 of
Nassau Senior’s Political Economy (1854, first pub. 1850), and Book III, Chapter
5, paragraphs 13-16 of Jean-Baptiste Say’s Treatise on Political Economy (1903, first pub.
1855).

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Some of the discussion of other early economists involving elasticity and taxation revolved
around the distinction between “necessities” and “luxuries.” Different writers had different
opinions of where to draw the line between the two categories, but in general, necessities were
those goods that a person needed to stay alive, be physically productive, and in some definitions,
remain socially acceptable. Luxuries were all other goods.

For instance, in paragraph 6 of Book III, Chapter 3 of Principles of Political Economy (1909,
first pub. 1848), John Stuart Mill essentially described the demand for necessities like bread as
inelastic: “There are many articles for which it requires a very considerable rise of price
materially to reduce the demand; in particular, articles of necessity, such as the habitual food of
the people in England, wheaten bread: of which there is probably almost as much consumed, at
the present cost price, as there would be with the present population at a price considerably
lower.” In other words, the change in the quantity demanded of bread would be proportionately
small relative to a change in price, which is the definition of inelastic demand today.

Today, the terms necessity and luxury are closely associated with another type of elasticity,
the income elasticity of demand. This type of elasticity is described on this webpage from
Digital Learning Resources.

David Ricardo explored the relative benefits of taxes on luxuries versus taxes on necessities
in Chapter 16, paragraph 44 of On the Principles of Political Economy and Taxation (1821):

Taxes on luxuries have some advantage over taxes on necessaries. They are generally paid from
income, and therefore do not diminish the productive capital of the country. If wine were much
raised in price in consequence of taxation, it is probable that a man would rather forego the
enjoyments of wine, than make any important encroachments on his capital, to be enabled to
purchase it. They are so identified with price, that the contributor is hardly aware that he is
paying a tax. But they have also their disadvantages. First, they never reach capital, and on some
extraordinary occasions it may be expedient that even capital should contribute towards the
public exigencies; and secondly, there is no certainty as to the amount of the tax, for it may not
reach even income. A man intent on saving, will exempt himself from a tax on wine, by giving

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up the use of it. The income of the country may be undiminished, and yet the State may be
unable to raise a shilling by the tax.

Implicit in this discussion is the notion that a man would be less likely to avoid a tax on a
necessity by no longer buying it, because he needs the necessity to stay alive and productive. If
the price of a necessity were to rise in consequence of taxation, the quantity demanded would not
fall as much because fewer people are able to reduce their consumption of necessities.

That earlier economists understood the ideas behind price elasticity of demand does not diminish
the importance of Marshall’s work in refining and formalizing the concept. The usefulness of his
framework and terminology was as apparent to other economists of Marshall’s day as it is to us
today. Just two years after Marshall’s Principles was published, Charles Bastable used
Marshall’s treatment of price elasticity of demand in his own analysis of tax policy. Unlike the
other economists we have seen, who confined their use of the concept underlying elasticity,
Bastable used Marshall’s vocabulary to discuss a further topic. He examined how the price
elasticity of demand in part determines how extensively a producer forced to pay a tax on the
goods he produces can pass the cost of the tax onto his customers. In Book III, Chapter
5, paragraph 24 of Public Finance (1892, first pub. 1917), he explained that:

Taxation imposed on a necessary article, or one which forms a very small part of the total outlay
of the consumer, will, since demand is inelastic, be more likely to pass on at once to the
consumer than if the commodity belonged to that large intermediate class, the demand for which
is speedily checked or increased by an upward or downward movement of price.

If the price elasticity of demand is high, then a producer that tries to pass along a tax by raising
his price will lose a proportionately large amount of sales. If demand is inelastic, then a producer
can raise his price without losing as proportionately large an amount of sales, and so pass along
the tax without hurting his total revenue.

Though it is still intimately tied to questions of tax policy, Bastable’s analysis represents an
application of price elasticity to an economic question to which it had not been applied before. It
is difficult from this temporal distance to know what influence Marshall’s exposition on

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elasticity had on this small but significant innovation, but it is at least plausible that Marshall’s
work on the subject played some role in its expanded use into other applications, including
lemonade stand revenue.

Conclusion

Elasticity in general, and price elasticity of demand in particular, allow economic agents to get a
firmer grasp of the actions they should take to improve the economic outcomes that affect them.
Classical economists were well aware of basic principle underlying elasticity, but they lacked a
vocabulary for discussing it in a unit-free way that was not specific to the market under
investigation. Given the limited applicability of any given estimate of elasticity, maybe that
should not be so surprising. After Marshall’s refinement and formalization of the concept, an
incremental expansion of the range of subjects to which elasticity was applied began, and the
number of decisions for which it became a useful tool expanded.

Footnotes
1.
In some extremely narrow cases when the percentage changes in price and quantity demanded
are very close, these statements may not hold. In the vast majority of cases, however, these
statements are correct.

2.
Strictly speaking, the changes in price are -20% and -10%, and the price elasticities of demand
should therefore be -1.5 and -0.5, respectively. By convention, however, price elasticities of
demand are expressed in absolute value, so that a larger number (in absolute value) implies a
higher degree of elasticity.

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II. DIFFERENT KINDS OF ELASTICITY

There are different types of elasticity, including price, income, cross, advertising, and unitary
elasticity. Elasticity measures how responsive quantity demanded or supplied is to changes in
price or income.

Price elasticity

 Perfectly elastic: Demand changes when price is constant, and the demand curve is
parallel to the X-axis

 Unitary: Quantity changes at the same rate as price

 Inelastic: Demand is not very responsive to price changes

 Perfectly inelastic: A change in price has no impact on quantity demanded

Income elasticity

 Measures how changes in income affect the quantity demanded for a product

 Luxury goods typically have high-income elasticity

Cross elasticity

 Looks at the proportional change in demand

 Positive cross elasticity is associated with substitute goods

 Negative cross elasticity is associated with complementary goods

Advertising elasticity

 Quantifies the change in demand of spending on advertising

 Shows how successful an increase in advertising dollars raises sales

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Elasticity of Demand
Elasticity of demand is an important variation on the concept of demand. Demand can be
classified as elastic, inelastic or unitary.

An elastic demand is one in which the change in quantity demanded due to a change in price
is large. An inelastic demand is one in which the change in quantity demanded due to a
change in price is small.
The formula for computing elasticity of demand is:

(Q1 – Q2) / (Q1 + Q2)

(P1 – P2) / (P1 + P2)

If the formula creates an absolute value greater than 1, the demand is elastic. In other words,
quantity changes faster than price. If the value is less than 1, demand is inelastic. In other
words, quantity changes slower than price. If the number is equal to 1, elasticity of demand is
unitary. In other words, quantity changes at the same rate as price.

Elastic Demand
Elasticity of demand is illustrated in Figure 1. Note that a change in price results in
a large change in quantity demanded. An example of products with an elastic demand is
consumer durables. These are items that are purchased infrequently, like a washing machine
or an automobile, and can be postponed if price rises. For example, automobile rebates have
been very successful in increasing automobile sales by reducing price.

Close substitutes for a product affect the elasticity of demand. If another product can easily
be substituted for your product, consumers will quickly switch to the other product if the
price of your product rises or the price of the other product declines. For example, beef, pork
and poultry are all meat products. The declining price of poultry in recent years has caused
the consumption of poultry to increase, at the expense of beef and pork. So products with
close substitutes tend to have elastic demand.

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An example of computing elasticity of demand using the formula is shown in Example 1.

When the price decreases from $10 per unit to $8 per unit, the quantity sold increases from
30 units to 50 units. The elasticity coefficient is 2.25.

Inelastic Demand
Inelastic demand is shown in Figure 2. Note that a change in price results in only
a small change in quantity demanded. In other words, the quantity demanded is not very
responsive to changes in price. Examples of this are necessities like food and fuel.
Consumers will not reduce their food purchases if food prices rise, although there may be
shifts in the types of food they purchase. Also, consumers will not greatly change their
driving behavior if gasoline prices rise.

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An example of computing inelasticity of demand using the formula above is shown in

Example 2. When the price decreases from $12 to $6 (50%), the quantity of demand
increases from 40 to only 50 (25%). The elasticity coefficient is .33.

This does not mean that the demand for an individual producer is inelastic. For example, a
rise in the price of gasoline at all stations may not reduce gasoline sales significantly.
However, a rise of an individual station’s price will significantly affect that station’s sales.

Unitary Elasticity

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If the elasticity coefficient is equal to one, demand is unitarily elastic as shown in Figure 3.
For example, a 10% quantity change divided by a 10% price change is one. This means that a
1% change in quantity occurs for every 1% change in price.

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1. Price Elasticity of Demand (PED)

Definition:
Price elasticity of demand (PED) measures how much the quantity demanded of a good or
service changes in response to a price change.

Formula:
=
% Change in Quantity Demanded
% Change in Price

PED=
% Change in Price
% Change in Quantity Demanded
​

Where:

% Change in Quantity Demanded =

New Quantity - Old Quantity
Old Quantity
×
100
Old Quantity
New Quantity - Old Quantity ×100
% Change in Price = New Price - Old Price
Old Price × 100

Old Price
New Price - Old Price
​
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×100
Types of PED:
Elastic Demand (PED > 1):

A small price change causes a large change in quantity demanded.

Examples: Luxury goods, branded clothing, high-end electronics.
Implication: Businesses should lower prices to increase total revenue.
Inelastic Demand (PED < 1):

A price change has a small effect on quantity demanded.

Examples: Necessities like fuel, salt, and essential medicines.
Implication: Businesses can raise prices without significantly reducing sales.
Unitary Elastic Demand (PED = 1):

The percentage change in demand is equal to the percentage change in price.

Implication: Total revenue remains constant regardless of price changes.
Perfectly Elastic Demand (PED = ∞):

Consumers will only buy at a specific price, and even a slight increase causes demand to drop to
zero.
Example: Goods sold in perfectly competitive markets.
Perfectly Inelastic Demand (PED = 0):

Quantity demanded remains the same regardless of price.

Example: Life-saving drugs like insulin.
Determinants of PED:
Availability of substitutes: More substitutes = more elastic demand.
Necessity vs. luxury: Necessities are inelastic; luxuries are elastic.
Time period: Short-term demand is inelastic, long-term demand is more elastic.
Proportion of income spent: Expensive goods tend to be more elastic.
Real-World Applications:
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Taxation policy: Governments tax inelastic goods (e.g., tobacco) to raise revenue.
Business pricing strategy: Companies adjust prices based on demand elasticity.
2. Price Elasticity of Supply (PES)
Definition:
Price elasticity of supply (PES) measures how much the quantity supplied of a good changes in
response to a price change.

Formula:

=
%
Change in Quantity Supplied
%
Change in Price
PES=
% Change in Price
% Change in Quantity Supplied
​

Types of PES:
Elastic Supply (PES > 1):

A small price increase results in a large supply increase.

Example: Manufactured goods, where production can be increased easily.
Inelastic Supply (PES < 1):

Supply changes slowly despite price changes.

Example: Agricultural products due to seasonal limitations.
Unitary Elastic Supply (PES = 1):
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The percentage change in supply equals the percentage change in price.

Perfectly Elastic Supply (PES = ∞):

Firms are willing to supply any quantity at a given price.

Perfectly Inelastic Supply (PES = 0):

Quantity supplied is fixed regardless of price.

Example: Land, rare paintings.
Determinants of PES:
Production time: Shorter production times lead to more elastic supply.
Availability of raw materials: Limited resources make supply inelastic.
Spare capacity: More capacity = higher elasticity.
Applications:
Government policies: PES determines how quickly supply can adjust to demand changes.
Firms’ production strategies: Companies with elastic supply can quickly respond to price
changes.
3. Income Elasticity of Demand (YED)
Definition:
Income elasticity of demand (YED) measures how demand for a good changes as consumer
income changes.

Formula:

=
%
Change in Quantity Demanded
%
Change in Income
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YED=
% Change in Income
% Change in Quantity Demanded
​

Types of YED:
Normal Goods (YED > 0):

Demand increases as income rises.

Example: Smartphones, clothing.
Luxury Goods (YED > 1):

Demand rises faster than income.

Example: High-end cars, designer bags.
Necessities (0 < YED < 1):

Demand rises but at a lower rate than income growth.

Example: Food, healthcare.
Inferior Goods (YED < 0):

Demand falls as income rises.

Example: Second-hand clothes, instant noodles.
Implications:
Helps businesses target income groups.
Assists policymakers in understanding economic welfare.
4. Cross Elasticity of Demand (XED)
Definition:
Cross elasticity of demand (XED) measures how demand for one good responds to price changes
in another.

Formula:
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=
%
Change in Quantity Demanded of Good A
%
Change in Price of Good B
XED=
% Change in Price of Good B
% Change in Quantity Demanded of Good A
​

Types of XED:
Substitutes (XED > 0):

Example: Tea and coffee.

Complements (XED < 0):

Example: Cars and fuel.

Unrelated Goods (XED = 0):

Example: Bread and televisions.

Applications:
Helps businesses predict demand shifts.
Used in competitive pricing strategies.
5. Elasticity of Substitution (ES)
Definition:
Measures how easily one input (e.g., labor) can be substituted for another (e.g., machines).

Formula:
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=
%
Change in Factor Ratio
%
Change in Price Ratio
ES=
% Change in Price Ratio
% Change in Factor Ratio
​

Applications:
Used in labor and capital decisions.
6. Advertising Elasticity of Demand (AED)
Definition:
Measures the effectiveness of advertising on demand.

Formula:
%
Change in Quantity Demanded
%
Change in Advertising Spending
AED=
% Change in Advertising Spending
% Change in Quantity Demanded
​

Applications:
Helps firms optimize advertising budgets.
7. Wage Elasticity of Labor Supply
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Definition:
Measures how labor supply responds to wage changes.

Applications:
Influences labor market policies.
8. Interest Elasticity of Investment
Definition:
Measures how investment responds to interest rate changes.

Applications:
Helps policymakers in monetary policy.

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ELASTICITY OF SUPPLY

Key points

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a
change in its price. It is computed as the percentage change in quantity demanded—or
supplied—divided by the percentage change in price.

Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very

responsive.

Elastic demand or supply curves indicate that the quantity demanded or supplied responds to
price changes in a greater than proportional manner.

An inelastic demand or supply curve is one where a given percentage change in price will cause
a smaller percentage change in quantity demanded or supplied.

Unitary elasticity means that a given percentage change in price leads to an equal percentage
change in quantity demanded or supplied.

What is price elasticity?

Both demand and supply curves show the relationship between price and the number of units
demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity
demanded, \[\text{Q}_d\], or supplied, \[\text{Q}_s\], and the corresponding percent change in
price.

The price elasticity of demand is the percentage change in the quantity demanded of a good or
service divided by the percentage change in the price. The price elasticity of supply is the
percentage change in quantity supplied divided by the percentage change in price.
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Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly
inelastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity
is greater than one, indicating a high responsiveness to changes in price. An inelastic
demand or inelastic supply is one in which elasticity is less than one, indicating low
responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of
either demand or supply.

Perfectly elastic and perfectly inelastic refer to the two extremes of elasticity. Perfectly elastic
means the response to price is complete and infinite: a change in price results in the quantity
falling to zero. Perfectly inelastic means that there is no change in quantity at all when price
changes.

If . . . It Is Called . . .

% Chage in quantity Perfectly elasti

= ∞
% Chage in price

% Chage in quantity Elastic

> 1
% Chage in price

% Chage in quantity Unitary

= 1
% Chage in price

% Chage in quantity Inelastic

< 1
% Chage in price

% Chage in quantity Perfectly inelastic

= 0
% Chage in price

Using the midpoint method to calculate elasticity

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To calculate elasticity, instead of using simple percentage changes in quantity and price,
economists sometimes use the average percent change in both quantity and price. This is called
the Midpoint Method for Elasticity:

Q2 − Q1
Q2 + Q1
( )
2
Midpoint method for elasticity =
P2 − P1
P2 + P1
( 2 )

The advantage of the midpoint method is that we get the same elasticity between two price points
whether there is a price increase or decrease. This is because the formula uses the same base for
both cases. The midpoint method is referred to as the arc elasticity in some textbooks.

Using the point elasticity of demand to calculate elasticity

A drawback of the midpoint method is that as the two points get farther apart, the elasticity value
loses its meaning. For this reason, some economists prefer to use the point elasticity method. In
this method, you need to know what values represent the initial values and what values represent
the new values.

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����� ���������� = ��� � − ������� �
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Calculating price elasticity of demand

Let’s apply these formulas to a practice scenario. We'll calculate the elasticity between
points \[\text{A}\] and \[\text{B}\] in the graph below.

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Image credit: Figure 1 in "Price Elasticity of Demand and Price Elasticity of Supply" by
OpenStaxCollege, CC BY 4.0

First, apply the formula to calculate the elasticity as price decreases from $70 at
point \[\text{B}\] to $60 at point \[\text{A}\]:

\[\begin{array}{ccc}
\mathrm{\% ~ change in quantity} & = & \frac{3,000–2,800}{\left (3,000+2,800\right )/2}~
\times ~ 100\\
& = & \frac{200}{2,900}~ \times ~ 100\\
& = & 6.9\\
\mathrm{\% change in price} & = & \frac{60–70}{\left (60+70\right )/2}~ \times ~ 100\\
& = & \frac{–10}{65}~ \times ~ 100\\
& = & –15.4\\
\text{Price elasticity of demand} & = & \frac{~ ~ ~ ~ 6.9\% }{–15.4\% }\\

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& = & 0.45

\end{array}\]

The elasticity of demand between point \[\text{A}\] and point \[\text{B}\] is \[\frac{~ ~ ~ ~
6.9\% }{–15.4\% }\], or 0.45. Because this amount is smaller than one, we know that the demand
is inelastic in this interval.

Wait a minute! Shouldn't the price elasticity of demand be negative here?

This means that, along the demand curve between point \[\text{B}\] and point \[\text{A}\], if the
price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will
result in a smaller percentage change in the quantity demanded. For example, a 10% increase in
the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price
will result in only a 4.5% increase in the quantity demanded.

Calculating the price elasticity of supply

Now let's try calculating the price elasticity of supply. We use the same formula as we did for
price elasticity of demand:

\[\begin{array}{ccc}
\text{Price elasticity of supply} & = & \frac{\mathrm{\% ~ change ~in ~quantity}}{\mathrm{\%
~ change~ in ~price}}
\end{array}\]

Assume that an apartment rents for $650 per month and, at that price, 10,000 units are rented—
you can see these number represented graphically below. When the price increases to $700 per
month, 13,000 units are supplied into the market.

By what percentage does apartment supply increase? What is the price sensitivity?

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Image credit: Figure 2 in "Price Elasticity of Demand and Price Elasticity of Supply" by
OpenStaxCollege, CC BY 4.0

We'll start by using the Midpoint Method to calculate percentage change in price and quantity:

\[\begin{array}{ccc}
\mathrm{\% ~ change~ in~ quantity} & = & \frac{13,000–10,000}{\left
(13,000+10,000\right )/2}~ \times ~ 100\\
& = & \frac{3,000}{11,500}~ \times ~ 100\\
& = & 26.1\\
\mathrm{\% ~ change~ in~ price} & = & \frac{\$ 700–\$ 650}{\left (\$ 700+\$ 650\right )/2}~
\times ~ 100\\
& = & \frac{50}{675}~ \times ~ 100\\
& = & 7.4\end{array}\]

Next, we take the results of our calculations and plug them into the formula for price elasticity of
supply:

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\[\begin{array}{ccc}
\mathrm{Price~ elasticity~ of~ supply} & = & \frac{\mathrm{\% change~ in~
quantity}}{\mathrm{\% change~ in~ price}}\\
& = & \frac{26.1}{7.4}\\
& = & 3.53
\end{array}\]

Again, as with the elasticity of demand, the elasticity of supply is not followed by any units.
Elasticity is a ratio of one percentage change to another percentage change—nothing more. It is
read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied
of 3.5%. The greater than one elasticity of supply means that the percentage change in quantity
supplied will be greater than a one percent price change.

Hang on! This sounds familiar. Is the elasticity the slope?

Summary

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a
change in its price. It is computed as the percentage change in quantity demanded—or
supplied—divided by the percentage change in price.

Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very

responsive.

Elastic demand or supply curves indicate that the quantity demanded or supplied responds to
price changes in a greater than proportional manner.

An inelastic demand or supply curve is one where a given percentage change in price will cause
a smaller percentage change in quantity demanded or supplied.

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Unitary elasticity means that a given percentage change in price leads to an equal percentage
change in quantity demanded or supplied.

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III. PRICE ELASTICITY OF DEMAND:

MEANING, TYPES, AND FACTORS THAT IMPACT IT

What Is Price Elasticity of Demand?

Price elasticity of demand is a measurement of the change in the demand for a product as a
result of a change in its price. If a price change creates a large change in demand, that is known
as elastic demand. If a price change creates a small change in demand, that is an inelastic
demand.

KEY TAKEAWAYS

 A good or service is considered perfectly elastic if the price elasticity is infinite,

meaning demand changes substantially even with minimal price change.
 If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.
 If a good’s price elasticity is 0, there is no amount of price change that produces a
change in demand, and it is perfectly inelastic.
 If a price change leads to an equal percentage change in demand, the price elasticity is
exactly 1, known as unitary elasticity.
 If there are no good substitutes and the product is necessary, demand won’t change when
the price goes up, making it inelastic.

Theresa Chiechi / Investopedia

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Understanding Price Elasticity of Demand

Economists have found that the prices of some goods are very inelastic. That is, a reduction in
price does not increase demand much, and an increase in price does not hurt demand, either.
This usually happens when there is no good substitute for a product, so consumers must
continue purchasing it even if the price changes.

Gasoline, for example, has little price elasticity of demand. Drivers will continue to buy as
much as they have to, as will industries such as airlines and trucking

Other goods are much more elastic, so price changes for these goods cause substantial changes
in their demand or their supply.

If the quantity demanded of a product changes greatly in response to changes in its price, it is
elastic. That is, the demand point for the product is stretched far from its prior point. If the
quantity purchased shows a small change after a change in its price, it is inelastic. The quantity
didn’t stretch much from its prior point.

Price elasticity of demand can be expressed mathematically as:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷

Percentage Change in Price
Marketing professionals often try to create inelastic demand for the products that they market.
They achieve that by identifying a meaningful difference in their products from any others that
are available.

Factors That Affect Price Elasticity of Demand

How elastic a product is depends on a variety of factors that can change over time. Some of
these factors are within a business's control. Others are a matter of market conditions.

Availability of Substitutes

The more easily a shopper can substitute one product for another, the more elastic demand for
those products will be. For example, if shoppers like coffee and tea equally, they will be happy
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to switch to tea if the price of coffee goes up. When this happens, the demand for coffee will
fall. This is because coffee and tea are considered good substitutes for each other.

Urgency

The more discretionary a purchase is, the more its quantity of demand will fall in response to
price increases. That is, the product demand has greater elasticity.

Say you are considering buying a new washing machine, but the current one still works; it’s just
old and outdated. If the price of a new washing machine goes up, you’re likely to forgo that
immediate purchase and wait until prices go down or the current machine breaks down.

The less discretionary a product is, the less its quantity demanded will fall in response to price
changes. Inelastic examples include:

 Luxury items, especially those bought specifically because of their brand names
 Addictive products, such as cigarettes
 Required add-on products, such as the correct ink for printers

One thing all these products have in common is that they lack good substitutes. If you really
want an Apple iPad, then a Kindle Fire won’t do, even if the price of the iPad goes up. Addicts
are not dissuaded by higher prices, and only one kind of ink cartridge will work in your printer.

Duration of Price Change

The length of time that the price change lasts also matters. Demand response to price
fluctuations is different for a one-day sale than for a price change that lasts for a season or a
year.

Clarity of time sensitivity is vital to understanding the price elasticity of demand and for
comparing it with different products. Consumers may accept a seasonal price fluctuation rather
than change their habits. For example, it will cost more to purchase a swimsuit in the summer
than in the winter. But most consumers still buy their swimsuits in the summer because that's
when they need them.

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Types of Price Elasticity of Demand and Examples

Price elasticity of demand is shown as a number ranging from zero to infinity. This is calculated
by dividing the percentage change in quantity demanded by the percentage change in price.
Each number represents a different type of elasticity and, therefore, a different type of consumer
behavior.

Types of Price Elasticity of Demand

Calculated Price Elasticity of Type of Result of Change in Price
Demand Elasticity
Infinity Perfectly elastic Demand declines to zero
Greater than 1 Elastic Significant change in demand
1 Unitary elasticity Equivalent percentage change in
demand
Less than 1 Inelastic Insignificant change in demand
0 Perfectly inelastic No change in demand

If the quantity of a product demanded or purchased changes more than the price changes, then
the product is considered to be elastic. If the change in quantity purchased is the same as the
price change, then the product is said to have unit (or unitary) price elasticity. And if the
quantity purchased changes less than the price, then the product is deemed inelastic.

For example, if the price goes up by 5%, but the demand falls by 10%, the product is elastic. If
a price change of 10% creates a 10% change in demand, the product shows unitary elasticity.
And if a price increase of 10% causes demand to fall by 5%, the product is inelastic.

Example

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Suppose that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In response,
grocery shoppers increase their apple purchases by 20%. The elasticity of apples is thus: 0.20 ÷
0.06 = 3.33. The demand for apples is elastic.

What Makes a Product Elastic?

If a price change for a product causes a substantial change in either its supply or its demand, it
is considered elastic. Generally, it means that there are acceptable substitutes for the product.
Examples would be cookies, SUVs, and coffee.

What Makes a Product Inelastic?

If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is
considered inelastic. Generally, it means that the product is considered to be a necessity or a
luxury item for addictive constituents. Examples would be gasoline, milk, and iPhones.

What Is the Importance of Price Elasticity of Demand?

Knowing the price elasticity of demand for goods allows someone selling that good to make
informed decisions about pricing strategies. This metric provides sellers with information about
consumer pricing sensitivity. It is also key for makers of goods to determine manufacturing
plans, as well as for governments to assess how to impose taxes on goods.

The Bottom Line

Price elasticity of demand is a ratio that shows how much demand for a product changes when
the price of that product changes. A ratio of greater than one indicates an elastic product; a ratio
of less than one indicates an inelastic product.

Economists and marketers use price elasticity of demand to understand how consumer behavior
changes in response to price. The more substitutes for a product there are, the more elastic
demand for it becomes. Businesses strive to create inelastic products that will retain the same
level of demand even when prices increase.

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What is Elasticity of Demand?

In economics, the terms supply and demand refer to the quantities of a product that suppliers bring
to market and that customers are willing to purchase, which is affected in particular by the price of
the product. In general, higher prices discourage customers and lower demand, while benefiting
suppliers who increase supply.

Supply and demand curves describe the relationship between

quantity and price for producers and consumers.

Theelasticity of demand measures the sensitivity of demand to changes in price or other relevant
factors. More specifically, the price elasticity of demand is the ratio between the percentage change
in the quantity of demand to a corresponding percentage change in price. This is an important
consideration in economic forecasting, as it indicates the effect of changing market conditions.
Demand for a non-essential luxury product might be very sensitive to changes in price, meaning a
price hike in response to an increase in material costs could have a major impact on profitability. On
the other hand, demand for necessities such as food and fuel is essentially constant even during times
of uncertainty when prices may increase. Product characteristics other than necessity that may affect

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the elasticity include the availability of alternative substitute products and the time required for
changes in price to make an impact on demand.
The definition of price elasticity of demand can be modified to measure the sensitivity of demand to
numerical parameters other than simply the price of the product itself. The change in demand can be
compared to changes in the price of a competing substitute product, changes in overall income levels,
and changes in advertising spending for the product, all of which could directly affect customer
sentiment. These three different types of demand elasticity will be discussed further below.
How to Measure the Three Cases of Demand Elasticity
The elasticity of demand, denoted by {eq}\varepsilon {/eq}, can be classified into one of three cases,
depending on whether changes in demand are proportionally larger than, equal to, or smaller than
changes in price (or other factors). These cases will distinguish whether or not a product is highly
sensitive to changing market conditions. Before listing the cases, it should be noted that, in general,
price elasticity is a negative value: {eq}\varepsilon<0 {/eq}. This is because an increase in price will,
in most cases, decrease consumer demand. Exceptions to this rule can exist; for example, a higher
price can be taken to signify higher quality, which is more desirable. Some authors prefer to ignore
the sign entirely, and define elasticity as an absolute value.
The three cases of demand elasticity are as follows:

 Demand is elastic if {eq}\varepsilon < -1 {/eq}. This means that demand is relatively
sensitive, and changes in price have a proportionally larger effect on demand.

 Demand is inelastic if {eq}-1 < \varepsilon < 0 {/eq}. This means that demand is
relatively insensitive, meaning changes in price have a proportionally smaller effect on
demand.

 Demand is unitary if {eq}\varepsilon = -1 {/eq}. This means that changes in demand are
exactly proportional to changes in price.
Types of Elasticity of Demand
As mentioned earlier, price is not the only factor that affects demand for a product. The sensitivity of
demand to three other factors can be measured using different definitions of elasticity.

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 Cross elasticity is the ratio between the percentage change in demand for one product
to the percentage change in price of a different product. If the products are unrelated, a
price change in one will have no effect on demand for the other, and the elasticity will
be zero. Alternatively, if the products are substitutes, meaning one can be used in place
of the other, a price increase of one should push customers toward using the alternative,
making the elasticity positive. If, instead, the elasticity is negative, then the products are
called complementary, meaning their price and demand change in tandem. For
example, rubber and tires are complementary products because one is used to make the
other. A price increase in rubber will cause a price increase for tires, lowering demand.
 Income elasticity measures the sensitivity of demand for a product to changes in overall
income levels. Income elasticity will typically be positive, since higher income allows for
more consumption, and thus higher demand for most products. Once again, there are
exceptions to this rule: inferior products might be in demand only at low income levels,
and a rise in income could result in their replacement by better alternatives. Luxury
products are likely to be elastic, meaning {eq}\varepsilon >1 {/eq} in this case, because
demand for luxuries is more dependent on the availability of disposable income.
Necessities will be inelastic, meaning {eq}0< \varepsilon <1 {/eq}, since customers are
mostly unable to reduce consumption during bad times, but conversely also do not
increase consumption much during good times.

 Advertisement elasticity is a measure of the effectiveness of advertising campaigns. It

compares the change in demand to the change in spending on advertising and will
usually be positive. New or low-priced products may be elastic, as advertising opens
new markets and the price is not a barrier for customers. Well-established or expensive
products do not have these advantages and are more likely to be inelastic.
Factors Affecting Demand Elasticity
While price elasticity of demand specifically measures the effect of price changes, other factors also
affect the level of demand. For example:

 Products which are necessities are typically price inelastic. Price changes have a
relatively small effect on demand, since the product is essential no matter the price.

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Luxury goods are typically elastic because they are attractive at low prices but can be
easily abandoned if prices rise too high.
 The presence and effect of substitutes in the market can be measured directly by the
cross elasticity. However, the availability of a substitute also tends to increase the price
elasticity. If prices increase, customers will switch to a substitute if one is available,
leading to a larger decrease in demand for the original product.
 Changes in price may have different effects on demand over time. For example,
transitioning away from fuels like oil and coal, or from addictive products like
cigarettes, is initially difficult. However, dependency on these products can be reduced
in the long-term. This will be reflected in measures of the elasticity, which is low at first
but increases over time, as lowering demand becomes more feasible.

Elasticity of Demand Formula

The relationship between price {eq}p {/eq} and the quantity of demand {eq}q {/eq} can sometimes
be modeled by a function, either {eq}q=q(p) {/eq} or {eq}p=p(q) {/eq}. The price elasticity of
demand can be calculated from the derivative of the quantity with respect to price:
$$\varepsilon = \dfrac{ d q/q } { d p/p } = \dfrac{p}{q} \cdot \frac{ d q}{dp} $$
If an exact equation for demand is not known, or if derivatives are an unfamiliar concept, there is an
alternative known as the arc elasticity of demand. This can be used when two data points of price
and demand are known. The percent change in price or demand is approximated as the difference
between the points divided by the midpoint (average) value:
$$\begin{array}{lcr} \Delta q = q_2 - q_1 & \quad & \bar q = \frac{q_1+q_2}{2} \\ \Delta p = p_2 -
p_1 &\quad& \bar p = \frac{p_1+p_2}{2} \end{array} $$
The arc elasticity of demand equation is
$$\varepsilon = \dfrac{ \Delta q/ \bar q} { \Delta p/ \bar p } = \dfrac{p_1+p_2}{q_1+q_2} \cdot
\dfrac{ q_2-q_1}{p_2-p_1} $$

Calculating Elasticity of Demand

The following are several examples of how to calculate elasticity of demand, solved step-by-step.

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 The quantity of blueberries (# of packages) demanded at price {eq}p {/eq} is modeled by

{eq}q(p) = 200 - 40p {/eq}. What is the price elasticity of demand at a price per package of
$3.25?

The demand equation is linear, and the derivative of quantity with respect to price is the slope of the
line: {eq}\frac{dq}{dp} = -40 {/eq}.
At the given price point, the quantity of demand is
$$q(3.25) = 200 - 40 (3.25) = 70 $$
The price, quantity, and derivative can be substituted into the formula for elasticity:
$$\varepsilon = \dfrac{p}{q} \cdot \frac{ d q}{dp} = \dfrac{3.25}{70} \cdot (-40) \approx -1.86 $$

Lesson Summary
Supply and demand describes the relationship between the price of a product and the quantity
provided by suppliers and demanded by customers. The price elasticity of demand measures how
sensitive the level of demand is to changes in price. Elasticity is typically negative since higher prices
usually decrease demand. The demand can be described as elastic ( {eq}\varepsilon<-1
{/eq}), inelastic ( {eq}-1<\varepsilon<0 {/eq}), or unitary ( {eq}\varepsilon=-1 {/eq}), depending
on whether changes in price produce relatively larger, smaller, or equal changes in demand. Elasticity
is calculated using the derivative of quantity of demand with respect to price:

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Understanding the Elasticity of Demand

Elasticity of demand is a fundamental concept in economics that measures how the quantity
demanded of a good or service changes in response to changes in its price, income, or the price
of related goods. Understanding elasticity is crucial for businesses, policymakers, and consumers
alike, as it influences market decisions and pricing strategies. In this article, we will explore the
definition, types, factors affecting demand elasticity, and its implications in real-world scenarios.

What is Elasticity of Demand?

Elasticity of demand refers to the percentage change in the quantity demanded of a product due
to a one percent change in its price. When demand is elastic, consumers are very responsive to
price changes, while inelastic demand means that consumers are less sensitive to such changes.
The formula for calculating the price elasticity of demand (PED) can be expressed as:
PED = frac{%text{ Change in Quantity Demanded}}{%text{ Change in Price}}
For example, if a 10% increase in the price of a product results in a 20% decrease in quantity
demanded, the elasticity of demand for that product would be:
PED = frac{-20%}{10%} = -2

Definition
1. Elastic Demand: A situation where a change in price leads to a larger change in quantity
demanded.
2. Inelastic Demand: A scenario where a change in price leads to a smaller change in quantity
demanded.
3. Unitary Elastic Demand: When the percentage change in quantity demanded is equal to the
percentage change in price.

Types of Elasticity of Demand

The elasticity of demand can be categorized into several types based on the factors affecting it.
The three most common types are:
 Price Elasticity of Demand (PED): Measures how sensitive the quantity demanded is to price
changes.
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 Income Elasticity of Demand (YED): Reflects how the quantity demanded changes in
response to changes in consumers’ income.
 Cross Price Elasticity of Demand (XED): Indicates how the quantity demanded of one good
changes in response to the price change of another good.
 Price Elasticity of Demand (PED) is perhaps the most well-known type of demand elasticity.
A product is said to have elastic demand if a small change in price leads to a large change in
quantity demanded. Conversely, if a price change leads to a relatively small change in
quantity demanded, the demand is considered inelastic.

Some products exhibit elastic demand, such as luxury goods or non-essential items. For example,
if the price of a luxury car increases, many consumers may choose not to purchase it, leading to a
significant drop in demand. On the other hand, commodities like essential medicines often have
inelastic demand, meaning that even if their prices rise, consumers will continue to buy them
because they are necessary.

Example
1. If the price of a specific brand of ice cream increases from $5 to $6, and as a result, the
quantity demanded decreases from 1000 units to 600 units, the PED would be calculated as
follows: [ PED = frac{-400/1000}{1/5} = -2 ]. This indicates elastic demand. 2. For a life-saving
drug, if the price rises from $50 to $60 but demand only drops from 2000 units to 1900 units, the
change shows PED close to 0, indicating inelastic demand.

Income Elasticity of Demand

Income Elasticity of Demand (YED) measures how the quantity demanded of a product changes
as consumer incomes change. This can be either positive or negative. When YED is positive, it
means that as income increases, the demand for that good also increases. This typically applies to
luxury goods. Alternatively, a negative YED indicates that as income rises, demand for a good
decreases, recognizable in inferior goods.

Example

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1. For a luxury watch, a YED greater than 1 indicates that for every 1% increase in income, the
demand for the watch increases by more than 1%. 2. In contrast, for a lower-quality bread brand,
if YED is negative, it implies that consumers will buy less of that bread as their income increases
and will switch to higher-quality brands.

Cross Price Elasticity of Demand

Cross Price Elasticity of Demand (XED) assesses the responsiveness of the quantity demanded
for one good in relation to the price change of another good. This elasticity can indicate whether
two products are substitutes or complements. If XED is positive, the two goods are substitutes,
meaning that if the price of one good rises, the demand for the other good increases. Conversely,
if XED is negative, it implies that the goods are complements, as an increase in the price of one
good will decrease the demand for the other.

Example
1. If the price of coffee rises causing the demand for tea to increase, then the two items are
substitutes, and XED is positive. 2. Alternatively, if the price of printers rises and subsequently,
the demand for ink cartridges decreases, this indicates that printers and ink cartridges are
complementary goods, resulting in a negative XED.
Factors Affecting Demand Elasticity
Several factors can significantly influence the elasticity of demand for a product. These include:

 Availability of Substitutes: The more substitutes available for a product, the more elastic the
demand tends to be.
 Proportion of Income: Goods that take a larger proportion of consumers’ income tend to
have more elastic demand.
 Necessity vs. Luxury: Necessities tend to have inelastic demand, while luxury items usually
have elastic demand.
 Time Period: Demand elasticity can change over time. In the short-term, demand may be
inelastic, but it can become elastic in the long-term as consumers adjust their habits.

Implications of Demand Elasticity for Businesses

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Understanding demand elasticity is vital for businesses as it helps them make informed pricing
decisions. If a company recognizes that the demand for its product is elastic, it may opt to lower
prices to increase total revenue. Conversely, if the demand is inelastic, increasing prices could
lead to greater revenue despite a drop in quantity sold.

Moreover, businesses can use elasticity data to segment market strategies and tailor their
approaches for different products based on consumer behavior and preferences. For example,
businesses can create promotional offers for products with elastic demand during peak seasons,
attracting more customers and maximizing profits.

Did You Know?

Did you know that the concept of elasticity was first introduced by Alfred Marshall in 1890? He
pioneered the study of how changes in supply and demand affect the price of goods!
Conclusion
The elasticity of demand is a crucial concept in economics that helps us understand how
consumers respond to various factors like price changes and income fluctuations. By
comprehending the different types of elasticity-price, income, and cross price-along with the
factors influencing them, both consumers and businesses can make better decisions in the market.
Furthermore, knowing whether a product has elastic or inelastic demand can significantly impact
pricing strategies and overall success.
In conclusion, elasticity of demand not only serves as a tool for economic analysis but also opens
a window to understanding consumer behavior in a dynamic marketplace. By grasping these
concepts, students and future economists can engage meaningfully with real-world economic
challenges.

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IV. ELASTICITY ON SUPPLY

How Does Price Elasticity Affect Supply?

Goods and services can be either elastic or inelastic. Elastic means the product is more sensitive
to price changes, such as luxury goods and non-necessary items. Inelastic means the product is
less sensitive to price movements—food and gas are examples of inelastic supply goods.

Price elasticity of supply is the responsiveness of a supply of a good or service after a change in
its market price. Basic economic theory states that supplies increase when prices rise and drop
when prices decrease. This happens because producers want to take advantage of a price rise, so
they produce more until demand is exceeded—at which time prices begin to fall. Producers then
decrease output to match the price decline.

KEY TAKEAWAYS

 Price elasticity of supply indicates how quickly producers shift production levels in
response to price changes.
 Economic theory predicts that when prices rise, producers tend to increase supplies at
higher prices.
 Prices may rise as quantity cannot keep up if producers can't cope with increasing
demand.

Formula and Calculation of Price Elasticity of Supply

To find an item's price elasticity of supply, you need to know the percent change in quantity
supplied and the percent change in its price.

PES=%CS÷%CPwhere:PES=Price elasticity of supplyCS=Change in supplyCP

=Change in price​ PES=%CS÷%CPwhere:PES=Price elasticity of supplyCS=
Change in supplyCP=Change in price​
So, imagine you have a farm that can produce and deliver 500 bushels of corn per quarter. The
price for one bushel in the first quarter was $157.56. In the second quarter, one bushel was
$159.25, and your farm produced and delivered 505 bushels.

First, determine the percent change in price:

 $159.25 - $157.56 = 1.69

 1.69 ÷ $157.56 = 0.0107
 0.0107 x 100 = 1.07%

Then, the percent change in supply:

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 505 - 500 = 5
 5 ÷ 500 = 0.01
 0.01 x 100 = 1.0%

Use the formula to calculate price elasticity:

1.0% ÷ 1.07% = 0.000107

A result of 0.0001 shows that your farm's corn price elasticity of supply is very low or inelastic.
But if your farm produced 525 bushels in the second quarter, the elasticity would change, but
still be inelastic:

 525 - 500 = 25
 25 ÷ 500 = 0.05, or 5%
 1.0% ÷ 5% = 0.2

A good or service's price affects the quantity demanded. Demand drops when its price
goes up and demand increases when the price goes down.

Elasticity of Supply Possibilities

Price elasticity of supply has five possibilities:

 Perfectly Elastic: The result is an infinite number.

 Elastic: The result is greater than one.
 Unitary: The result equals one.
 Inelastic: The result is less than one.
 Perfectly Inelastic: The result is equal to zero.

So, if the corn from your farm has a price elasticity of supply equal to 0.2, it is inelastic.

Perfectly Elastic Supply

The PES for perfectly elastic supply is infinite, where the quantity supplied is unlimited
at a given price, but no quantity can be supplied at any other price. There are virtually no
real-life examples of this, where even a small price change would dissuade or disallow
product makers from supplying even a single product.

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Image by Sabrina Jiang © Investopedia 2020

Elastic Supply
A price elasticity supply greater than one means supply is elastic, where the quantity
supplied changes by a larger percentage than the price change. An example would be a
product that’s easy to make and distribute, such as a fidget spinner. The resources to
make additional spinners are readily available, and the total cost would be minimal to
ramp production up or down.

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Image by Sabrina Jiang © Investopedia 2020

Unitary Elastic Supply

Unitary Elasticity Supply has a PES of one, where the quantity supplied changes by the
same percentage as the price change.

Image by Sabrina Jiang © Investopedia 2020

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Inelastic Supply
The PES for relatively inelastic supply is between zero and one. That means the
percentage change in quantity supplied changes by a lower percentage than the
percentage of price change. An inelastic example is nuclear power, which has a long
lead time given the construction, technical know-how, and long ramp-up process for
plants.

Perfectly Inelastic Supply

Perfectly inelastic supply is when the PES formula equals zero. That is, there is no
change in quantity supplied when the price changes. Examples include products that
have limited quantities, such as land or a painting from deceased artists. The amount of
gold on earth, for instance, is finite.

Likewise, the number of Bitcoins to ever be mined is capped. As a result, at some point,
there cannot be an increase in supply regardless of the price for these two assets.
Therefore, their elasticity of supply could become perfectly inelastic in the future.

Image by Sabrina Jiang © Investopedia 2020

Price Elasticity of Supply vs. Demand

Price elasticity of supply refers to how responsive supply is to price changes—price
elasticity of demand (PED) refers to how responsive demand is to price changes.

While price elasticity of supply is related to producer behavior, where producers

increase and decrease supply due to price, PED is related to consumer behavior. The
theory behind PED is that consumers will demand less when prices go higher.
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What Does Elasticity of Prices Mean?

Elasticity of prices refers to how much supply and/or demand for a good changes as its
price changes. Highly elastic goods see their supply or demand change rapidly with
relatively small price changes.

Why Do Suppliers Increase Production When Prices Rise?

Rising prices often signal that demand is outpacing supply for a given product, meaning
that the market could absorb more supply. Moreover, firms can profit by selling more
goods at relatively higher prices, at least until the newly available supply leads prices to
fall back down.

What Does Perfectly Inelastic Mean?

When a good has zero elasticity, it is called "perfectly" inelastic. This means the
product's supply and/or demand will not change, even as its price changes. Rare
paintings, especially those by a deceased or notable artist, are considered an example of
perfectly inelastic supply. Insulin for diabetics is an example of a good with perfectly
inelastic demand.

The Bottom Line

Companies hope to keep their price elasticity of supply high to remain nimble should the
price of their products shift. That is, they want to be able to capture more profit should
prices rise or trim production should prices fall. To help boost PES, companies can do
several things.

These include improving the technology used, such as upgrading equipment and
software to improve efficiency. Improved capacity and capacity on hand also boost PES,
including boosting the stock on hand and expanding storage space and systems. Beyond
that, improving how products are shipped and distributed can help. PES can also be
increased by ensuring products can last long while stored.

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Elasticity of Supply: Meaning and Importance

The law of supply explains the general relationship between the price of a commodity and
the quantity supplied, but it doesn’t provide specific details about how much supply changes
when the price changes.

To understand this more clearly, we need to look at the concept of elasticity of supply. In this
article, we will discuss key ideas related to the elasticity of supply, the elasticity of the supply
formula, different types of elasticity of supply, the supply curve characteristics, how to measure
its price elasticity and many more.

What is Elasticity of Supply?

The price elasticity of supply measures how much the quantity supplied changes when the price
of a product changes. It helps understand how the supply of a product is affected by price
fluctuations in the market. It also provides an idea of the profit that can be earned by selling the
product at different prices. Price elasticity of supply refers to how the supply of a good or
service reacts to a change in its price.

According to basic economic theory, when the price of a product increases, the supply of that
product usually decreases.Similarly, the price elasticity of demand can be studied to understand
how demand for a product changes with price changes. If the price of a product changes, the
demand for that product changes quickly. This is called price elasticity of demand.

Elasticity of Supply Example

Imagine the price of coffee rises from 3to4 per cup. If coffee producers can quickly increase the
amount of coffee they produce to meet the higher demand, the supply is considered elastic. This
means that producers are able to respond to the price change by supplying more coffee.

On the other hand, if the price of housing rises, but builders cannot quickly construct more
houses due to limited land, time, and resources, the supply of houses is considered inelastic. The
quantity of houses supplied doesn't change much in response to price increases.In summary, the
elasticity of supply shows how much producers can adjust the quantity they supply when prices
change.

Price Elasticity of Supply FormulaAfter having understood the elasticity of supply definition in
economics, we now move to the elasticity of supply formula which is based on its definition.

ES=%ΔP%ΔQHere,

ES denotes the elasticity of supply which is equal to the percentage change in quantity supplied
divided by the percentage change in the price of the commodity.
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The Law of Supply

In a free market, producers compete to make profits, so profits are never the same over time or
for different products. Because of this, entrepreneurs move resources and labour to products that
make more money and away from those that make less money.

The law of supply explains that price and quantity are connected. For example, if consumers
want more oranges and fewer apples, more money will be spent on oranges, while less will be
spent on apples. As a result, the price of oranges goes up.

Steps to Measure Elasticity of Supply:

Calculate the change in quantity supplied: Find the difference in the quantity supplied before
and after the price change.Calculate the change in price: Find the difference in the price before
and after the change.

Use the formula: Apply the changes in quantity supplied and price to the formula.5 Types of
Elasticity of SupplyThe price elasticity of supply has five types: perfectly elastic, more than unit
elastic, unit elastic supply, less than unit elastic, and perfectly inelastic. Read below to learn
more about each type in detail.

Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is
infinite. This means that even for a slight increase in price, the supply becomes infinite. For a
perfectly elastic supply, the percentage change in the price is zero for any change in the quantity
supplied.

More than Unit Elastic Supply: When the percentage change in the supply is greater than the
percentage change in price, then the commodity has the price elasticity of supply greater than

1. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its
quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in
this case, is equal to
2. Less than Unit Elastic Supply: When the supply of a product changes less than its price, we
can say that the supply is relatively inelastic. In this situation, the price elasticity of supply is
less than
3. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the
percentage change in the quantity supplied is zero irrespective of the change in its price. This
type of price elasticity of supply applies to exclusive items. For example, a designer gown
styled by a famous personality.It is important to note that the elasticity of supply is always a
positive number. This is because the law of supply says that the quantity supplied is always
directly related to changes in the price of a product. In other words, when the market price of a
product increases, its supply either increases or stays the same.

Determinants of Elasticity of SupplyMarginal Cost- As the cost of producing one more unit is
rising with output or Marginal Costs (which are the increased costs related to each additional
unit produced) are rising rapidly with output, then the rate of output production will be limited,
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i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity
supplied changes less than the change in price. However, if Marginal Cost rises slowly, then
Supply will be elastic.

Time- As supply's price elasticity rises over time, producers would boost the quantity supplied
by a larger percentage compared to the increase in price.

Number of Firms- It is more likely that the supply will be elastic when there are a large number
of firms. This occurs because other firms can step in to fill the supply gap.

Mobility of Factors of Production- When the factors of production can move easily, the price
elasticities of supply become higher. This means that labour and other resources needed for
production can be brought in from different areas to boost production quickly.

The Elasticity of Supply Curves

We have previously inferred the elasticity of supply definition, the elasticity of supply formula,
and its various types. Let us now have a look at how these different values of the price elasticity
of the supply formula are plotted on the graph. Keeping the quantity supplied on the X-axis and
the price of the commodity on the Y-axis, we can draw certain conclusions from the different
values of elasticity of the supplied formula. When ES = infinite (Perfectly elastic supply), the
curve (SS) is a straight line parallel to the X-axis. When ES>1, a flatter curve (S2S2) is obtained
which when extended intersects the Y-axis.When ES<1, it results in a steeper curve (S3S3),
which when extended crosses the X-axis.When ES=1, the curve (S4S4) comes out to be a
straight line that passes through the origin at an angle of 45 degrees. When ES=0 (Perfectly
inelastic supply), the curve (S1S1) obtained is parallel to the Y-axis. This graph shows us the
relationship between the different types of elasticity of supply and helps in understanding the
elasticity of supply definition better.

Did You Know?

Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his
book “Principles of Economics” in 1890. He was the one to define the elasticity of supply and
deduced the price elasticity of the supply formula. He also explained that the prices of some
goods such as medications, salt, gasoline, etc. can increase without reducing their demand in the
market, which means that their prices are inelastic. This is because these goods are crucial to the
everyday lives of consumers.

Conclusion

The elasticity of supply is a key concept that helps us understand how producers respond to
price changes. It shows the relationship between price and the quantity of a product supplied.
The greater the ability of producers to adjust production when prices change, the more elastic
the supply. On the other hand, when producers are less able to adjust supply in response to price
changes, the supply is considered inelastic.By measuring the price elasticity of supply,
businesses and economists can predict how changes in prices might affect supply in various
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industries. Understanding this concept is essential for pricing strategies, production planning,
and understanding market dynamics. Ultimately, the elasticity of supply plays a significant role
in determining how efficiently markets operate in response to changing economic conditions.

What Factors Influence a Change in Supply Elasticity?

Elasticity is a key concept in economics. It measures how sensitive one variable is when one or
more variables change. Elasticity generally refers to how consumer demand for a good or
service is affected when certain variables rise and drop, such as price or income.

When elasticity is greater than 1, demand tends to be more sensitive. Conversely, demand is
inelastic when the value of elasticity is less than 1. This means that demand remains the same
regardless of changes in any other variable.

Elasticity can be categorized in several forms, including price, demand, and supply. These types
can be affected by various factors. In this article, we examine some of the things that can impact
the elasticity of supply

KEY TAKEAWAYS

 Elasticity measures the sensitivity of one variable when another variable changes.
 Supply elasticity refers to the responsiveness of producers or industries when demand
changes.
 Factors like prices, the availability of resources, technology and innovation, and
competition in the market can affect the elasticity of supply.

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Investopedia / Alison Czinkota

What Is Supply Elasticity?

Supply elasticity is a measure of the responsiveness of an industry or a producer to changes in
demand for its product. Put simply, it measures a producer's ability to effectively cope with
changes in demand. Several factors can affect the elasticity of supply. They include:

 Price: Producers tend to cut prices when supplies are abundant. On the other
hand, prices tend to rise when supplies of goods and services are scarce.
 Availability of Resources: If a company depends on an increasingly scarce resource to
produce its product, it may be unable to step up production when demand increases.
Moreover, the resource will become increasingly expensive, forcing a corresponding
increase in the producer's price, or decrease in its production, or both.
 Technology and Innovation: More efficient production reduces costs and allows for
larger production numbers at lower prices.
 Competition: An increase in the number of suppliers makes the price of a product or
service more elastic. If one supplier can't meet demand, others will rush to fill the gap.

Let's take a look at these factors in a little more detail.

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Technology innovation can reduce supply elasticity. More efficient production reduces costs
and allows for expanded production.

Price
One of the main factors that affect changes in supply elasticity is price. If supply is elastic, so is
price. A greater supply of a product or service reduces its cost. A scarcer supply forces prices up.

This relationship can be calculated by measuring the percentage change in supply and the
percentage change in its price from one period to the next. Dividing the change in supply by the
change in price results in a numerical value. If that number is more than one, the product shows
price elasticity. If it is less than one, the product is inelastic.

Consider the price of gasoline, which is elastic. Consumers must buy it regardless of its price.
Its supply is also elastic. As such, the industry will generally increase production to meet
demand. Consumers felt the pinch when Russia invaded Ukraine. Crude oil prices jumped to as
high as $110 per barrel in March 2022 as Russia cut supplies in response to economic
sanctions.1 Gas prices averaged $3.95 per gallon in the U.S. in 2022, which was an increase of
more than 31% from the previous year.2

Availability of Resources
Inputs can have a major impact on the supply elasticity. These include things like labor, raw
materials, and access to technology and production materials.

When resources are readily available, supplies are rendered elastic. This allows producers to
increase the supply of goods and services. In this case, prices also tend to go down. If there is a
limited supply of resources, supplies may be scarce. This, in turn, can raise prices.

Technology and Innovation

Supply elasticity can be affected by the production process. More specifically, it can be
influenced by any technology and innovation that producers use in their manufacturing process.

If a company doesn't innovate and uses outdated technology in its production process, the
supply of (finished) goods and services may be more limited. On the other hand, improving the
production process by adopting new technologies and innovations can help make supplies more
elastic.

Flexibility is another factor that affects supply elasticity. If a resource becomes scarce, can
another resource be substituted? Can production be ramped up quickly in response to greater
demand? Efficient producers can respond more quickly to increased demand.

Competition
Competition exists when multiple producers, companies, and suppliers can co-exist and profit
by selling to consumers in the open market. Greater competition among producers can render
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supplies elastic as multiple players produce similar products and fight for profits. Companies
will have to respond more quickly to meet demand. If one can't meet demand, others will
generally be able to fill that gap.

Conversely, if competition stifles and leaves just a few producers in the market (or, in some
cases, just one producer), supplies of products and services may be rendered inelastic. This
tends to be true in industries that are very capital-intensive or those that require highly-skilled
labor, such as the tech or pharmaceutical industry.

What Is Supply Elasticity?

Supply elasticity, which is also referred to as the elasticity of supply, measures how quickly a
company, producer, or industry responds to changes in the demand for its product or services.
When elasticity is at zero, it means there is a fixed amount of the product. As such, the producer
doesn't respond to any changes in price.

What Does Elasticity Mean in Economics?

The term elasticity refers to the change in demand for a good or service as related to its price.
For instance, a product or service is considered elastic if demand increases when the price drops
or decreases when the price rises. By contrast, a product may be inelastic if demand doesn't
change when the price changes.

What Are the Types of Elasticity?

Elasticity refers to how quickly one variable responds to the change in another variable. Some
types of elasticity are the elasticity of demand, elasticity of supply, price elasticity of demand,
income elasticity of demand, price elasticity of supply, and price elasticity of supply

The Bottom Line

The term supply refers to the total amount of goods and services that someone is willing to sell
to others in the economy. This can refer to a supplier who sells unfinished goods to a
manufacturer or a company that sells finished goods to consumers. The elasticity of supplies, or
how responsive producers are to changes in the demand for supplies, depends on one or more
factors, including prices, the availability of resources, technology, and competition in the
market.

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The Elasticity of Supply Definition

The elasticity of supply definition is based on the law of supply, which states that the number of
goods and services supplied will usually change when prices change.

The law of supply states that when there is an increase in the price of a good or service, the supply
for that good will increase. On the other hand, when there is a decrease in the price of a good or
service, the quantity of that good will decrease.

But how much will the quantity of a good or service decrease when there is a price decrease? What
about when there is a price increase?

The elasticity of supply measures how much the quantity supplied of a good or service changes
when there is a price change.

The amount by which the quantity supplied increases or decreases with a price change depends on
how elastic the supply of a good is.

 When there is a change in price and firms respond with a slight change in the quantity
supplied, then the supply for that good is quite inelastic.

 However, when there is a change in price, which leads to a more significant change in
quantity supplied, the supply for that good is quite elastic.

The ability of suppliers to alter the quantity of a good they produce directly impacts the degree to
which the quantity supplied can change in response to a change in price.

Think about a construction company that builds houses. When there is a sudden increase in the
housing price, the number of homes built does not increase as much. That's because construction
companies need to hire additional workers and invest in more capital, making it harder to respond to
the price increase.

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Although the construction company can't start building a significant number of houses in response
to the price increase in the short run, in the long run, constructing houses is more flexible. The
company can invest in more capital, employ more labor, etc.

Time has a strong influence on the elasticity of supply. In the long run, the supply of a good or
service is more elastic than in the short run.

Formula for Elasticity of Supply

The formula for elasticity of supply is as follows.

Price elasticity of Supply=%ΔQuantity supplied%ΔPrice

The elasticity of supply is computed as the percentage change in quantity supplied divided by the
percentage change in price. The formula shows how much a change in price changes the quantity
supplied.

Elasticity of Supply Example

As an example of elasticity of supply, let's assume that the price of a chocolate bar increases from
$1 to $1.30. In response to the price increase of the chocolate bar, firms increased the number of
chocolate bars produced from 100,000 to 160,000.

To calculate the price elasticity of supply for chocolate bars, let's first calculate the percentage
change in price.

%ΔPrice=1.30−11=0.301=30%

Now let's calculate the percentage change in quantity supplied.

%ΔQuantity=160,000−100,000100,000=60,000100,000=60%
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Using the formula

Price elasticity of Supply=%ΔQuantity supplied%ΔPrice we can calculate the price elasticity of

supply for chocolate bars.

Price elasticity of Supply=60%30%=2

As the price elasticity of supply equals 2, it means that a change in the price of chocolate bars changes the
quantity supplied for chocolate bars by twice as much.

Types of Supply Elasticity

There are five main types of supply elasticity: perfectly elastic supply, elastic supply, unit elastic supply,
inelastic supply, and perfectly inelastic supply.

Types of Supply Elasticity: Perfectly Elastic Supply.

Figure 1 shows the supply curve when it is perfectly elastic.

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When a good's elasticity of supply equals infinity, the good is said to have perfect elasticity.

This indicates that the supply can accommodate a rise in the price of any magnitude, even if just
slightly. It means that for a price above P, the supply for that good is infinite. On the other hand, if
the price of the good is below P, the quantity supplied for that good is 0.

Types of Supply Elasticity: Elastic supply.

Figure 2 below shows the elastic supply curve.

Fig 2. Elastic Supply

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The supply curve for a good or service is elastic when the elasticity of supply is greater than 1. In such a
case, a price change from P1 to P2 leads to a greater percentage change in the number of goods supplied
from Q1 to Q2 compared to the percentage change in price from P1 to P2.

For example, if the price were to increase by 5%, the quantity supplied would increase by 15%.
On the other hand, if the price of a good were to decline, the quantity supplied for that good would
decrease by more than the decrease in price.

A firm has an elastic supply when the quantity supplied changes by more than the change in price.
Types of Supply Elasticity: Unit Elastic Supply.

Figure 3 below shows the unit elastic supply curve.

Fig 3. - Unit Elastic Supply

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A unit elastic supply occurs when the elasticity of the supply is 1.

A unit elastic supply means that the quantity supplied changes by the same percentage as the change
in price.

For example, if the price were to increase by 10%, the quantity supplied would also increase by
10%.

Note in Figure 3 the magnitude of the price change from P1 to P2 is equal to the magnitude of the
change in quantity supplied from Q1 to Q2.

Types of Supply Elasticity: Inelastic Supply.

Figure 4 below shows a supply curve that is inelastic.

Do you want to see this and many more great infographics?

Fig 4. - Inelastic Supply

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An inelastic supply curve occurs when the elasticity of supply is less than 1.

An inelastic supply means that a change in price leads to a much smaller change in quantity
supplied. Notice in Figure 4 that when the price changes from P1 to P2, the difference in quantity
from Q1 to Q2 is smaller.

Types of Supply Elasticity: Perfectly Inelastic Supply.

Figure 5 below shows the perfectly inelastic supply curve.

Fig 5. - Perfectly Inelastic Supply

A perfectly inelastic supply curve occurs when the elasticity of supply equals 0.

A perfectly inelastic supply means that a change in price leads to no change in quantity. Whether
the price triples or quadruples, the supply remains the same.

An example of a perfectly inelastic supply could be the Mona Lisa painting by Leonardo Da Vinci.

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The Elasticity of Supply Determinants

The elasticity of supply determinants includes factors that influence the ability of a firm to change
its quantity supplied in response to a price change. Some of the key determinants of the elasticity of
supply include time period, technological innovation, and resources.

 Time period. In general, the long-term behavior of supply is more elastic than its short-term
behavior. In a short amount of time, businesses are less flexible in making adjustments to
the scale of their factories in order to produce more or less of a certain good. Therefore, the
supply tends to be more inelastic in the short term. In contrast, over more extended periods,
firms have the opportunity to construct new factories or shut down older ones, hire more
labor, invest in more capital, etc. Therefore, the supply, in the long run, is more elastic.

 Technological innovation. Technological innovation is a crucial determinant of the

elasticity of supply in many industries. When companies use technological innovation,
which makes production more efficient and productive, they can supply more goods and
services. A more effective manufacturing method will save expenses and make it possible to
produce larger quantities of goods at a cheaper cost. Therefore, a price increase would lead
to a greater increase in quantity, making the supply more elastic.

 Resources. Resources that a firm uses during its production process play an essential role in
determining the responsiveness of a firm to a price change. When the demand for a product
rises, it may be impossible for a firm to meet that demand if the manufacture of their product
depends on a resource that is becoming rare.

Elasticity of Supply - Key takeaways

 The elasticity of supply measures how much the quantity supplied of a good or service
changes when there is a price change.
 The formula for elasticity of supply is Price elasticity of Supply=%ΔQuantity
supplied%ΔPrice
 There are five main types of supply elasticity: perfectly elastic supply, elastic supply, unit
elastic supply, inelastic supply, and perfectly inelastic supply.
 Some of the key determinants of the elasticity of supply include time period, technological
innovation, and resources.
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