Introduction to Elasticity
5.3 Elasticity and Pricing
By the end of this section, you will be able to:
- Analyze how price elasticities impact revenue
- Evaluate how elasticity can cause shifts in demand and supply
- Predict how the long-run and short-run impacts of elasticity affect equilibrium
- Explain how the elasticity of demand and supply determine the incidence of a tax on buyers and sellers
Studying elasticities is useful for a number of reasons, pricing being most important. Let's explore how elasticity relates to revenue and pricing, both in the long run and short run. But first, let's look at the elasticities of some common goods and services.
Table 5.2 shows a selection of demand elasticities for different goods and services drawn from a variety of different studies by economists, listed in order of increasing elasticity.
| Goods and Services | Elasticity of Price |
|---|---|
| Housing | 0.12 |
| Transatlantic air travel (economy class) | 0.12 |
| Rail transit (rush hour) | 0.15 |
| Electricity | 0.20 |
| Taxi cabs | 0.22 |
| Gasoline | 0.35 |
| Transatlantic air travel (first class) | 0.40 |
| Wine | 0.55 |
| Beef | 0.59 |
| Transatlantic air travel (business class) | 0.62 |
| Kitchen and household appliances | 0.63 |
| Cable TV (basic rural) | 0.69 |
| Chicken | 0.64 |
| Soft drinks | 0.70 |
| Beer | 0.80 |
| New vehicle | 0.87 |
| Rail transit (off-peak) | 1.00 |
| Computer | 1.44 |
| Cable TV (basic urban) | 1.51 |
| Cable TV (premium) | 1.77 |
| Restaurant meals | 2.27 |
Table5.2 Some Selected Elasticities of Demand
Note that necessities such as housing and electricity are inelastic, while items that are not necessities such as restaurant meals are more price-sensitive. If the price of the restaurant meal increases by 10%, the quantity demanded will decrease by 22.7%. A 10% increase in the price of housing will cause a slight decrease of 1.2% in the quantity of housing demanded.