Introduction to Elasticity

Read this chapter to learn about the concept of elasticity. Be sure to read all the sections in this chapter (Sections 5.1-5.4) following the introduction.

5.4 Elasticity in Areas Other Than Price

By the end of this section, you will be able to:

  • Calculate the income elasticity of demand and the cross-price elasticity of demand
  • Calculate the elasticity in labor and financial capital markets through an understanding of the elasticity of labor supply and the elasticity of savings
  • Apply concepts of price elasticity to real-world situations

The basic idea of elasticity ­– how a percentage change in one variable causes a percentage change in another variable ­– does not just apply to the responsiveness of supply and demand to changes in the price of a product. Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price.