Elasticity: Elasticity

Elastic vs. Inelastic?

An elasticity of 1 is the established borderline between elastic and inelastic goods. A curve with an elasticity of 1 is called unit elastic; an elasticity of 1 indicates perfect responsiveness of quantity to price; that is, in a unit elastic supply curve, a 10% increase in price yields a 10% increase in quantity; a unit elastic demand curve will have a decrease in quantity of 10% with a price decrease of 10%.

If the elasticity of demand is greater than or equal to 1, meaning that the percent change in quantity is great than the percent change in price, then the curve will be relatively flat and elastic: small price changes will have large effects on demand. If the elasticity of the demand curve is less than 1, meaning the percent change in quantity is less then the percent change in price, then the curve will be steep and inelastic: it will take a big change in price to affect demand.

Similarly, if the elasticity of supply is greater than or equal to 1, the curve will be elastic: relatively flat, with quantity supplied very responsive to changes in price. If the elasticity of the supply curve is less than 1, it will be inelastic: the curve will be flatter and quantity supplied will be less responsive to changes in price.

Remember that elasticity is an absolute value; it doesn't indicate an increase in quantity with an increase in price when you are dealing with downward-sloping curves.

Except for curves with an elasticity of 1, elasticity on straight-line curves is not constant. Why is this? As you move along the curve, the slope stays constant, so that each movement yields the same amount of increase or decrease. But as a curve shifts out, these increases or decreases make up a different percentage of the base amount, and the resulting percentage changes are therefore different at different points on the curve. Thus, unless elasticity is specifically stated to be constant on a curve, it usually changes from point to point, and so we usually only study the elasticity of demand or supply at a specific point (usually at the equilibrium point).

Note: One solution to studying elasticity over a curve, rather than at a specific point, is to calculate elasticity using the following formula:

Elasticity = (Change in quantity/Average quantity) / (Change in price/Average price)
Elasticity = ((Q1 - Q2) / (Q1 + Q2)/2 )) / ((P1 - P2)/( (P1 + P2)/2))

This formula will give you an approximation of the elasticity over a range, instead of a point-specific elasticity, but as the range gets larger, the result becomes less and less accurate, which is why many economists prefer to use the traditional measure of elasticity.

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