elasticity is the ratio of the incremental percentage change in one variable with respect to an incremental percentage change in another variable. Elasticity is usually expressed as a negative number but shown as a positive percent value.

One typical application of the concept of elasticity is to consider what happens to consumer demand for a good (for example, a product) when prices increase. As the price of a good rises, consumers will usually demand a lower quantity of that good, perhaps by consuming less, substituting other goods, and so on. The greater the extent to which demand falls as price rises, the greater is the price elasticity of demand. However, there may be some goods that consumers require, cannot consume less of, and cannot find substitutes for even if prices rise (for example, certain prescription drugs). For such goods, the price elasticity of demand might be considered inelastic.

Further, elasticity will normally be different in the short term and the long term. For example, for many goods the supply can be increased over time by locating alternative sources, investing in an expansion of production capacity, or developing competitive products which can substitute. One might therefore expect that the price elasticity of supply will be greater in the long term than the short term for such a good, that is, that supply can adjust to price changes to a greater degree over a longer time.

This applies to the demand side as well. For example, if the price of gasoline rises, consumers will find ways to conserve their use of the resource. However, some of these ways, like finding a more fuel-efficient car, take time. So consumers as well may be less able to adapt to price shocks in the short term than in the long term.

Price elasticity of demand is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price. For example, if, in response to a 10 % fall in the price of a good, the quantity demanded increases by 20 %, the price elasticity of demand would be 20 %/(− 10 %) = −2. (Case & Fair, 1999: 109).

In general, a fall in the price of a good is expected to increase the quantity demanded, so the price elasticity of demand is negative as above. Note that in economics literature the minus sign is often omitted and the elasticity is given as an absolute value. (Case & Fair, 1999: 110). Because both the denominator and numerator of the fraction are percent changes, price elasticities of demand are dimensionless numbers and can be compared even if the original calculations were performed using different currencies or goods.

Goods are considered inelastic when the quantity demanded does not change much with the price. Neccesities have highly inelastic demand curves (approaching vertical lines). For instance, antibiotics may cure a person who would otherwise die. The sick person will likely pay anything for the neccesary medication to keep himself alive. By constrast, elastic goods face large changes in quantity demanded with relatively small changes in price. Elastic goods have demand curves that approach horizontal lines. Elastic goods are usually those with very similar substitutes. For example, if you might buy a twenty sticks of generic chewing gum a week at $.05 a stick. If the price goes up to $.06, you switch over to another generic brand of gum. Your weekly quantity demanded has shifted from twenty to zero. A sharp decrease for only a slight change in price.

Price Elasticity of Supply

In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product(A) to a change in price of product (A) alone

It is measured as the percentage change in supply that occurs in response to a percentage change in price. For example, if, in response to a 10% rise in the price of a good, the quantity supplied increases by 20%, the price elasticity of supply would be 20%/10% = 2. (Case & Fair, 1999: 119).

The quantity of a good supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down. In the long run, however, quantity supplied and quantity produced are synonymous.

cross elasticity of demand or cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good.

It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.

In the example above, the two goods, fuel and cars, are complements - that is, one is used with the other. In these cases the cross elasticity of demand will be negative. In the case of perfect complements, the cross elasticity of demand is 'negative' infinity.

Where the two goods are substitutes the cross elasticity of demand will be positive, so that as the price of one goes up the quantity demanded of the other will increase. For example, in response to an increase in the price of fuel, the demand for new cars that are fuel efficient hybrids for example will also rise. In the case of perfect substitutes, the cross elasticity of demand is 'positive' infinity.

Where the two goods are independent, the cross elasticity demand will be zero: as the price of one good changes, there will be no change in quantity demanded of the other good. In case of perfect independence, the cross elasticity of demand is zero.

In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good.

Formula: (%change in demand) / (%change in income) = Income elasticity

It is measured as the percentage change in demand that occurs in response to a percentage change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.