Elasticity: how strongly quantity reacts — Economics, 14–17
Elasticity measures how much buying or selling changes when a price, income or another condition changes. It helps explain why the same price rise affects different products and people differently.
Idea
Elasticity asks: if one thing changes, how much does another thing respond? A small price rise may greatly reduce sales of cinema tickets, but hardly change sales of essential medicine. It is a way to compare reactions, not just to say that a reaction exists.
Why it was needed
Knowing only that demand falls when price rises is not enough for a shop, a government or a household. They need to know whether sales fall by 2% or 30%, because that changes revenue and the effect of a tax. Elasticity gives this comparison using percentages, so products with different units can be compared.
Worked example
A cinema ticket rises from €10 to €12, while weekly sales fall from 100 to 80. Using the midpoint method, price changes by 2/11 = 18.2%, and quantity by -20/90 = -22.2%. Elasticity is -22.2/18.2 ≈ -1.22: sales react more than proportionally.
The trap
A common mistake is to divide every change by the old value and treat the result as perfectly reversible. That seems reasonable because “change from the starting point” is familiar. But going from €10 to €12 is a 20% rise, while returning from €12 to €10 is only a 16.7% fall; the midpoint method avoids this direction problem.
Where it appears
Businesses use elasticity when testing prices: a higher price can increase revenue if customers barely change their buying, but reduce it if they leave quickly. Governments also use it when predicting a tax’s effect on fuel, tobacco or public transport. The estimate is never magic; habits and alternatives can change it.
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