Elasticity (economics)

[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.

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.

In contrast, a raise from an initially high price might bring on a less-than-proportionate rise in quantity supplied.

Elasticity is a popular tool among empiricists because it is independent of units and thus simplifies data analysis.

(unit elasticity) because at that point a change in price is exactly cancelled by the quantity response, leaving the total revenue

To maximize revenue, a firm must decrease price if demand is inelastic:

[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).

[13] Example: In the above graphical representation which shows an effect of prices on demand.

[16] Generally, a higher income will increase quantity demanded as consumers will be willing to spend more.

[11] Finding a high-cross price elasticity between the goods may indicate that they are more likely substitutes and may have similar characteristics.

[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).

[25] 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] 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.

[25] 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.

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.

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).

However, suppliers can also hire more labour overtime, raise more funds, build more new factories to expand production capacity, and ultimately increase supply.

For enterprises, elasticity is relevant in the calculation of the fluctuation of commodity prices, and its relation to income.

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.

Often, the demand for goods will be significantly reduced when a government increases taxes on them.

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.