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Glossary Political Economy / Term

Elasticity

A measure of the degree of responsiveness of one variable to changes in another. For example, the price elasticity of demand for a particular good is the relative degree of responsiveness of the quantity demanded to relatively small changes in its price. On a supply-demand graph drawn as normally presented in textbooks, elasticity of demand can be very roughly assessed simply by eyeballing the steepness of the slope of the demand curve : a very steeply sloping demand curve (that is, almost straight up and down) indicates that a given percentage increase in price will induce only a comparatively smaller percentage decrease in the quantity of the commodity that potential consumers wish to buy ("relatively inelastic demand "); while a very gently sloping demand curve shows that a given percentage increase in price will produce a still larger percentage decrease in quantity demanded ("relatively elastic demand ").

Similarly, price elasticity of supply measures the degree of proportionality with which the quantity of a commodity offered for sale on the market changes in response to a given change in the going price; income elasticity of demand measures the responsiveness of consumer demand for a commodity to changes in consumer incomes; and so on. Presumably the term "elasticity" was originally adopted because it enables us to compare how much several dependent variables "stretch" in response to the same degree of "pulling force" from the same independent variable.

When a numerical estimate is required for a precise prediction of the consequences of a particular price change for the quantity of a good likely to be traded, elasticity is usually defined by the percentage change in the dependent variable (for example, quantity demanded) divided by the associated percentage change in the independent variable (for example, price). Ignoring the plus or minus sign, an elasticity greater than 1 is referred to as relatively elastic and an elasticity less than 1 is referred to as relatively inelastic. (An elasticity precisely equal to 1 is termed unit elasticity.) For relatively small changes, this is practically equivalent to the calculus expression below that includes the slope of the curve and the values of the independent and dependent variables at the point on the curve in question where elasticity is being assessed:

elasticity = (dY/dX) * X/Y

where X is the independent variable (price, income, etc.) and Y is the dependent variable (quantity demanded, quantity supplied, etc). (Notice that the presence of X and Y as well as dX and dY in the expression makes the elasticity vary based not only on the general slope of the curve but also based on the particular part of the curve that is under consideration -- the elasticity is not generally identical for each and every segment of a given demand or supply curve.)

Permanent link Elasticity - Creation date 2020-06-14


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