Elasticity

Elasticity pertains to the responsiveness of one variable to changes in another variable. More elastic = more responsive / sensitive.
- It is expressed as a ratio of two percentages
- Notation: By default, assume elasticity is with respect to quantity.
Price elasticity is the ratio between the percentage change in the quantity and the corresponding percent change in price. There are various kinds of elasticity

Goods that are readily available are likely to have highly elastic supply curves.
Luxury items that have a high price, and good with many substitutes are likely to have highly elastic demand curve.
Goods with limited supply of inputs are likely to feature highly inelastic supply curves
Necessities and goods with no clear substitutes as well as addictive substances are likely to have highly inelastic demand curves.
Elasticity affects the dynamics between how fluctuations in price affects quantity and vice versa.
- More inelastic = more price sensitive. More elastic = more quantity sensitive.
- More inelastic demand = more revenue for the producer, the higher price that the good can be sold.
- When supply / demand is inelastic, taxes are less effective at reducing the equilibrium quantity since producers (for supply) / consumers (for demand) bear the tax.
- When supply / demand is elastic, taxes are less effective at reducing the equilibrium price. In this case, less of the good is sold instead.
Elasticity is often lower in the short run rather than in the long run. This is due to changes in the quantity more so than the changes in price.
- In the long term, quantity tends to fluctuate more than price.
- In terms of demand, this is due to spending habits as well as having more disposable income.
- In terms of demand, this is due to expanding production and reducing costs long term.

Extensions

Income elasticity of demand - the precent change in quantity demanded divided by the percent change in income.
- In most cases, the income elasticity of demand is positive. This is true for normal goods.
- For inferior goods, the reverse is true. Income elasticity is negative.
Cross-Price Elasticity of Demand - the percentage change in the quantity of good that is demanded as a result of a percent change in the price of good .
- Substitute goods have positive cross-price elasticities of demand.
- Complement goods have negative cross-price elasticities of demand.
Wage Elasticity of Labor Supply - the percentage change in quantity of labor supplied divided by the change in wage.
Elasticity of savings - the percentage change in the quantity of savings divided by the percentage change in interest rate.