Introduction

Elasticity is a powerful and elegant concept and measures the response or sensitivity of one economic variable against change in another.   Such measurement is important to economic agents because it in turn helps them to understand the impact of an economic action undertaken and thereby helps in decision making.

One economic variable is price whose response is often sought on another economic variable which is quantity demanded. An economic agent such as a bakery owner may be interested in finding out how a price rise affects how many loaves of bread he sells in his store. The bakery owner may be thinking, "If I raise the price of the most popular loaf of garlic-bread in my store by $1, will this reduce significantly the number of garlic-loaves that I sell, or will it just reduce it by an insignificant number?" As a business owner, this is indeed an important question to him because he does not want to adopt a pricing policy, if possible, that will make him lose too many customers and erode the revenue from sales. Understanding the concept of price-elasticity of demand can help him in his decision making process of whether to raise the price or not.

In a microeconomics class, a lot of time is spent talking about price elasticity of demand and supply. I will elaborate here the price elasticity of demand in details. However, the concept of elasticity is broad and can be applied to a wide range of variables, not just to price and quantity demanded or supplied. I will also examine some of the other variables.