## 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

#### Expanding the Concept of Elasticity

The elasticity concept does not even need to relate to a typical supply or demand curve at all. For example, imagine that you are studying whether the Internal Revenue Service should spend more money on auditing tax returns. The question can be framed in terms of the elasticity of tax collections with respect to spending on tax enforcement; that is, what is the percentage change in tax collections derived from a percentage change in spending on tax enforcement?

With all of the elasticity concepts that have just been described, some of which are listed in Table 5.4, the possibility of confusion arises. When you hear the phrases "elasticity of demand" or "elasticity of supply," they refer to the elasticity with respect to price. Sometimes, either to be extremely clear or because a wide variety of elasticities are being discussed, the elasticity of demand or the demand elasticity will be called the price elasticity of demand or the "elasticity of demand with respect to price". Similarly, elasticity of supply or the supply elasticity is sometimes called, to avoid any possibility of confusion, the price elasticity of supply or "the elasticity of supply with respect to price". But in whatever context elasticity is invoked, the idea always refers to percentage change in one variable, almost always a price or money variable, and how it causes a percentage change in another variable, typically a quantity variable of some kind.

 $\text {Income elasticity of demand} =\frac{\% \text { change in } \mathrm{Qd}}{\% \text { change in income }}$ $\text {Cross-price elasticity of demand} =\frac{\% \text { change in } Q d \text { of good } A}{\% \text { change in price of good } B}$ $\text {Wage elasticity of labor supply} =\frac{\% \text { change in quantity of labor supplied }}{\% \text { change in wage }}$ $\text {Wage elasticity of labor demand} =\frac{\% \text { change in quantity of labor demanded }}{\% \text { change in wage }}$ $\text {Interest rate elasticity of savings} =\frac{\% \text { change in quantity of savings }}{\% \text { change in interest rate }}$ $\text {Interest rate elasticity of borrowing} =\frac{\% \text { change in quantity of borrowing }}{\% \text { change in interest rate }}$

Table 5.4 Formulas for Calculating Elasticity