In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable.

It is a tool for
measuring the responsiveness of a function to changes in parameters in a unit-less way. Frequently used elasticities include price
elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of
production andelasticity of intertemporal substitution.

Elasticity is one of the most important concepts in economic theory. It is useful in understanding the incidence of indirect
taxation,marginal concepts as they relate to the theory of the firm, and distribution of wealth and different types of goods as they relate
to thetheory of consumer choice. Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer
surplus,producer surplus, or government surplus.

In empirical work an elasticity is the estimated coefficient in a linear regression equation where both the dependent variable and
theindependent variable are in natural logs. Elasticity is a popular tool among empiricists because it is independent of units and thus
simplifies data analysis.

Generally, an "elastic" variable is one which responds "a lot" to small changes in other parameters. Similarly, an "inelastic" variable
describes one which does not change much in response to changes in other parameters. A major study of the price elasticity of
supplyand the price elasticity of demand for US products was undertaken by Hendrik S. Houthakker and Lester D. Taylor.[1]

Mathematical definition

The definition of elasticity is based on the mathematical notion of point elasticity.

In general, the "x-elasticity of y" is:

The "x-elasticity of y" is also called "the elasticity of y with respect to x".

Elasticities of demand

 Price elasticity of demand

Main article: Price elasticity of demand

Price elasticity of demand measures the percentage change in quantity demanded caused by a percent change in price. As such, it
measures the extent of movement along the demand curve. This elasticity is almost always negative and is usually expressed in terms
of absolute value. If the elasticity is greater than 1 demand is said to be elastic; between zero and one demand is inelastic and if it
equals one, demand is unit-elastic.(Represented by 'PED')

 Income elasticity of demand

Main article: Income elasticity of demand

Income elasticity of demand measures the percentage change in demand caused by a percent change in income. A change in income
causes the demand curve to shift reflecting the change in demand. YED is a measurement of how far the curve shifts horizontally
along the X-axis. Income elasticity can be used to classify goods as normal or inferior. With a normal good demand varies in the same
direction as income. With an inferior good demand and income move in opposite directions.(Represented by 'YED')[2]
  Cross price elasticity of demand

Main article: Cross price elasticity of demand

Cross price elasticity of demand measures the percentage change in demand for a particular good caused by a percent change in the
price of another good. Goods can be complements, substitutes or unrelated. A change in the price of a related good causes the demand
curve to shift reflecting a change in demand for the original good. Cross price elasticity is a measurement of how far, and in which
direction, the curve shifts horizontally along the x-axis. A positive cross-price elasticity means that the goods are substitute goods.
(Represented by 'XED')

 Cross elasticity of demand between firms

Main article: Conjectural variation

Cross elasticity of demand for firms, sometimes referred to as conjectural variation, is a measure of the interdependence between
firms. It captures the extent to which one firm reacts to changes in strategic variables (price, quantity, location, advertising, etc.) made
by other firms.

 Elasticity of intertemporal substitution

Main article: Elasticity of intertemporal substitution

From Wikipedia, the free encyclopedia

Arc elasticity is the elasticity of one variable with respect to another between two given points.

The y arc elasticity of x is defined as:

where the percentage change is calculated relative to the midpoint

The midpoint arc elasticity formula was advocated by R. G. D. Allen due to the following properties: (1) symmetric with respect to the
two prices and two quantities, (2) independent of the units of measurement, and (3) yield a value of unity if the total revenues at two
points are equal.[1]

Arc elasticity is used when there is not a general function for the relationship of two variables. Therefore, point elasticity may be seen
as an estimator of elasticity; this is because point elasticity may be ascertained whenever a function is defined.

For comparison, the y point elasticity of x is given by:

Application in economics
 The P arc elasticity of Q is calculated as

The percentage is calculated differently from the normal manner of percent change. This percent change uses the average (or
midpoint) of the points, in lieu of the original point as the base.

Example

Suppose that you know of two points on a demand curve (Q1,P1) and (Q2,P2). (Nothing else might be known about the demand curve.)
Then you obtain the arc elasticity (a measure of the price elasticity of demand and an estimate of the elasticity of a differentiable curve
at a single point) using the formula

Suppose we measure the demand for hot dogs at a football game. Let's say that after halftime we lower the price, and quantity
demanded changes from 80 units to 120 units. The percent change, measured against the average, would be (120-80)/
((120+80)/2))=40%.

Normally, a percent change is measured against the initial value. In this case, this gives (12-8)/8= 50%. The percent change for the
opposite trend, 120 units to 80 units, would be -33.3%. The midpoint formula has the benefit that a movement from A to B is the same
as a movement from B to A in absolute value. (In this case, it would be -40%.)

Suppose that the change in the price of hot dogs was from $3 to $1. The percent change in price measured against the midpoint would
be -100%, so the price elasticity of demand is (40%/-100%) or -40%. It is common to use the absolute value of price elasticity, since
for a normal (decreasing) demand curve they are always negative. Thus the demand of the football fans for hot dogs has 40%
elasticity, and is therefore inelastic.