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Elasticity

Elasticity is a property of demand that captures the responsiveness or sensitivity of the quantity demanded to changes in one or more economic variables, such as price, income, or the price of related goods.

Elasticity is about proportional responsiveness (percentage changes).

Elasticity: Measures the percentage change in one variable in response to a 1% change in another variable, such as price elasticity of demand (how demand changes with price). It captures proportional responsiveness, emphasizing relative changes rather than absolute amounts.

Formulation: Price Elasticity of Demand (PED)

\[ E_d = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} = \frac{\Delta Q / Q}{\Delta P / P} = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \]

Where:

  • \(E_d\) = Price elasticity of demand
  • \(Q\) = Quantity demanded
  • \(P\) = Price
  • \(\Delta Q\) = Change in quantity demanded
  • \(\Delta P\) = Change in price

Interpretation:

  • \(|E_d| > 1\) → Demand is elastic (quantity demanded changes proportionally more than price).
  • \(|E_d| = 1\) → Demand is unit elastic.
  • \(|E_d| < 1\) → Demand is inelastic (quantity demanded changes less than price).

Genesis & Evolution

The concept of elasticity in economics originated in the 19th century as economists sought formal tools to describe the sensitivity of one economic variable to changes in another. The term was first popularized by Alfred Marshall in his Principles of Economics (1890), where he introduced price elasticity of demand as a way to quantify how quantity demanded responds to price changes.

Early Development:

  • Pre-Marshallian thought recognized that demand and price were related, but lacked precise mathematical language to describe that relationship.
  • Marshall's contribution was to define elasticity as a unit-free ratio (percentage change over percentage change), which allowed comparison across goods and contexts.

Reflection

The concept of elasticity is an effective conceptual abstraction used to capture the rate of change of one variable with respect to another. While the formula can be constructed in different ways, some formulations provide more interpretable or analytically useful insights.

TODO: Reflect on the definition of elasticity, and its benefits; for that keep in mind what the concept wants to capture.

References