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A Beginner's Guide to Elasticity

Elasticity Explained


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[Q:] I'm taking economics in college for the first time and I keep hearing the term elasticity. We've been given about five different formulas for elasticity and I'm not sure when we should use any of them. Can you help me out?

[A:] Absolutely! Elasticity is a concept that is used throughout microeconomics and is often misunderstood by students.

On the right hand side of this article I've included links explaining each of the major types of elasticity. You can also take a tour explaining each type one at a time by following the link on the bottom of this article.

What is Elasticity?

The Economics Glossary gives the following definition for elasticity:

"Elasticity is a measure of responsiveness. The responsiveness of behavior measured by variable Z to a change in environment variable Y is the change in Z observed in response to a change in Y. Specifically, this approximation is common:

elasticity = (percentage change in Z) / (percentage change in Y)

The smaller the percentage change in Y is practical, the better the measure is and the closer it is to the intended theoretically perfect measure."

Don't worry if that definition went over your head. The key thing to understand is that we use elasticity when we want to see how one thing changes when we change something else. How does demand for a good change when we change its price? How does the demand for a good change when the price of a substitute good changes? These are the type of questions that elasticities help us answer.

Next: Price Elasticity of Demand

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