Elasticity is a measure out of the responsiveness of one economical variable to another. For example, advertising elasticity is the human relationship between a change in a firm'southward advertising budget and the resulting change in product sales. Economists are oftentimes interested in the price elasticity of demand, which measures the response of the quantity of an item purchased to a modify in the item's price. A good or service is considered to be highly elastic if a slight change in price leads to a abrupt alter in demand for the production or service. Products and services that are highly elastic are usually more discretionary in nature—readily available in the market place and something that a consumer may not necessarily demand in his or her daily life. On the other hand, an inelastic good or service is one for which changes in price result in only minor changes to demand. These goods and services tend to be necessities.

Elasticity is usually expressed as a positive number when the sign is already clear from context. Elasticity measures are reported equally a proportional or percent change in the variable being studied. The general formula for elasticity, represented by the letter "E" in the equation beneath, is:

E = percentage change in x / percent change in y.

Elasticity tin be naught, one, greater than ane, less than one, or space. When elasticity is equal to i at that place is unit elasticity. This means the proportional change in one variable is equal to the proportional change in another variable, or in other words, the 2 variables are directly related and move together. When elasticity is greater than one, the proportional change in x is greater than the proportional change in y and the situation is said to be elastic.

Inelastic situations result when the proportional modify in 10 is less than the proportional change in y. Perfectly inelastic situations consequence when whatever change in y will accept an infinite effect on 10. Finally, perfectly elastic situations result when any change in y will result in no change in 10. A special example known as unitary elasticity of demand occurs if total revenue stays the same when prices modify.

ELASTICITY FOR MANAGERIAL DECISION MAKING

Economists compute several different elasticity measures, including the price elasticity of need, the price elasticity of supply, and the income elasticity of need. Elasticity is typically defined in terms of changes in total revenue since that is of primary importance to managers, CEOs, and marketers. For managers, a key point in the discussions of demand is what happens when they raise prices for their products and services. Information technology is important to know the extent to which a per centum increase in unit of measurement price will touch on the demand for a product. With elastic demand, total acquirement will decrease if the toll is raised. With inelastic demand, however, total revenue will increase if the toll is raised.

The possibility of raising prices and increasing dollar sales (full revenue) at the same time is very bonny to managers. This occurs only if the demand curve is inelastic. Here full acquirement will increment if the toll is raised, but total costs probably will not increment and, in fact, could go downwards. Since turn a profit is equal to total acquirement minus full costs, profit will increase equally toll is increased when need for a product is inelastic. It is important to note that an entire demand curve is neither rubberband nor inelastic; it simply has the particular condition for a change in total acquirement between two points on the bend (and not along the whole curve).

Need elasticity is affected by iii things: ane) availability of substitutes; two) the urgency of need, and iii) the importance of the detail in the customer'southward budget. Substitutes are products that offer the buyer a selection. For example, many consumers see corn fries as a good or homogeneous substitute for tater chips, or see sliced ham equally a substitute for sliced turkey. The more than substitutes available, the greater will be the elasticity of demand. If consumers see products as extremely different or heterogeneous, nevertheless, and then a detail need cannot easily exist satisfied by substitutes. In contrast to a production with many substitutes, a product with few or no substitutes—like gasoline—will take an inelastic demand curve. Similarly, need for products that are urgently needed or are very important to a person'south budget volition tend to be inelastic. It is important for managers to sympathize the price elasticity of their products and services in guild to set prices accordingly to maximize house profits and revenues.

BIBLIOGRAPHY

Haines, Leslie. "Elasticity is Dorsum" Oil and Gas Investor. November 2005.

Hodrick, Laurie Simon. "Does Price Elasticity Touch Corporate Fiscal Decisions?" Journal of Financial Economic science. May 1999.

Montgomery, Alan L., and Peter Eastward. Rossi. "Estimating Price Elasticity with Theory-Based Priors." Journal of Marketing Research. November 1999.

Perreault, William E. Jr., and Due east. Jerome McCarthy. Basic Marketing: A Global-Managerial Approach. McGraw-Hill, 1997.