ECONOMICS OF ELASTICITY

Lecturer Ranjita Islam

INTRODUCTION:
Elasticity is of great importance to business, marketing, and economics. Studies in economics
begin by expressing the importance of the ceteris paribus (translation means all else is held
constant) assumption and by focusing on relationships between the possible prices of an item
and the quantities consumers are willing and able to purchase at each price; likewise, the
quantities suppliers are willing and able to produce.
Elasticity is one of the most important concepts in neoclassical economic theory. It is useful
for understanding the distribution of wealth and different types of goods as they relate to
the theory of consumer choice. Elasticity is also crucially important in any discussion
of welfare distribution, in particular consumer surplus, producer surplus, or government
surplus.
The concept of elasticity has an extraordinarily wide range of applications in economics. In
particular, an understanding of elasticity is fundamental in understanding the response
of supply and demand in a market. Common uses of elasticity including Effect of changing
price on firm revenue, analysis of incidence of the tax burden and other government policies,
income elasticity of demand, used as an indicator of industry health, future consumption
patterns and as a guide to firms' investment decisions, effect of international trade and terms
of trade effects, analysis of consumption and saving behavior, analysis of advertising on
consumer demand for particular goods, etc.
On the consumer or demand side, students learn very early in their coursework that an
inverse relationship exists between price and quantity in accordance with the Law of
Demand. Relatively speaking, smaller amounts are in demand at higher prices and vice versa.
On the producer or supply side, they learn that a positive relationship exists according to the
Law of Supply. Whether one chooses to focus on demand or on supply, elasticity is a concept
that helps us to understand in precise terms exactly how much quantity changes in response
to a price change.
Many students completing and evaluating introductory courses in economics for non-business
majors find the elasticity topic easy to comprehend. Additionally they report that the topic
makes perfect sense to them and is highly relevant to their everyday exchanges. Some
commonly used textbooks in economics (Arnold, 2005; Guell, 2007; McConnell & Brue,
2008; Parkin, 2000) provide basic topical coverage, but unfortunately very few articles found
during a recent search of electronic publications present economic elasticity in a
straightforward manner, without references and narrow application to a specific context.
Furthermore, those contexts usually require readers to have an advanced understanding of
economics and other business disciplines.
From an economics education perspective, this paper represents one effort to facilitate an
undergraduate student's understanding of the elasticity concept.

Central Research Questions

1.0: What is elasticity?
2.0: What is Price Elasticity of Demand?
2.1: What are the Determinants and influences of it?
3.0: How is price elasticity of demand computed?
4.0: Demand curve and elasticity
4.1: What is Perfectly Inelastic demand?
4.2: What is Inelastic demand?
4.3: What is Unit Elastic Demand?
4.4: What is Elastic Demand?
4.5: What is Perfectly Elastic Demand?
5.0: What is the relationship between price Elasticity and Total Revenues?
6.0: What are the other demand Elasticites?
6.1: Income Elasticity
6.2: Cross Elasticity
7.0: What is Price Elasticity of Supply?
8.0: The three Applications of Demand, Supply and Elasticity
8.1: Applications to Major Economic Issues:
9.0: What are the Effects of Elasticity?

Economics of Elasticity:
Elasticity:
According to the dictionary elasticity means: 1. the ability of an object or material to resume
its normal shape after being stretched or compressed; stretching. 2. the ability to change and
adapt; adaptability.
But in the context of Economics it means something somewhat different. If put simply
Elasticity is a measure of how much the quantity demanded of a service/good changes in
relation to its price, income or supply.

What is it and how it works:

If the quantity demanded changes a lot when prices change a little, a product is said to
be elastic. This often is the case for products or services for which there are many
alternatives, or for which consumers are relatively price sensitive. For example, if the price of
Cola A doubles, the quantity demanded for Cola A will fall when consumers switch to lessexpensive Cola B.
When there is a small change in demand when prices change a lot, the product is said to be
inelastic. The most famous example of relatively inelastic demand is that for gasoline. As the
price of gasoline increases, the quantity demanded doesn't decrease all that much. This is
because there are very few good substitutes for gasoline and consumers are still willing to
buy it even at relatively high prices.

Why it is important:
Elasticity is important because it describes the fundamental relationship between the price of
a good and the demand for that good. Elastic goods and services generally have plenty of
substitutes. As an elastic service/good's price increases, the quantity demanded of that good
can drop fast. Example of elastic goods and services include furniture, motor vehicles,
instrument engineering products, professional services, and transportation services.
Inelastic goods have fewer substitutes and price change doesn't affect quantity demanded as
much. Some inelastic goods include gas, electricity, water, drinks, clothing, tobacco, food,
and oil.

Price Elasticity of Demand:

Price elasticity of demand is basically a measure of how much the quantity demanded of a
good responds to a change in the price of that good, computed as the percentage change in
quantity demanded divided by the percentage change in price.

Price elasticity of demand (PED or Ed) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its
price. More precisely, it gives the percentage change in quantity demanded in response to a
one percent change in price (holding constant all the other determinants of demand, such as
income). It was devised by Alfred Marshall.
Price elasticities are almost always negative, although analysts tend to ignore the sign even
though this can lead to ambiguity. Only goods which do not conform to the law of demand,
such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is
said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value):
that is, changes in price have a relatively small effect on the quantity of the good demanded.
The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than
one (in absolute value): that is, changes in price have a relatively large effect on the quantity
of a good demanded.
Revenue is maximized when price is set so that the PED is exactly one. The PED of a good
can also be used to predict the incidence (or "burden") of a tax on that good. Various research
methods are used to determine price elasticity, including test markets, analysis of historical
sales data and conjoint analysis.

Factors influencing Price Elasticity of Demand:

Availability of Close Substitutes:
Goods with close substitutes tend to have more elastic demand because it is easier for
consumers to switch from that good to others. For example, butter and margarine are easily
substitutable. A small increase in the price of butter, assuming the price of margarine is held
fixed, causes the quantity of butter sold to fall by a large amount. By contrast, because eggs
are a food without a close substitute, the demand for eggs is less elastic than the demand for
butter. A small increase in the price of eggs does not cause a sizable drop in the quantity of
eggs sold.
Necessities and Luxuries: Necessities tend to have inelastic demands, whereas luxuries have
elastic demands. When the price of a doctors visit rises, people will not dramatically reduce
the number of times they go to the doctor, although they might go somewhat less often. By
contrast, when the price of sailboats rises, the quantity of sailboats demanded falls
substantially. The reason is that most people view doctor visits as a necessity and sailboats as
a luxury. Whether a good is a necessity or a luxury depends not on the intrinsic properties of
the good but on the preferences of the buyer. For avid sailors with little concern about their
health, sailboats might be a necessity with inelastic demand and doctor visits a luxury with
elastic demand.
Definition of the Market: The elasticity of demand in any market depends on how we draw
the boundaries of the market. Narrowly defined markets tend to have more elastic demand

than broadly defined markets because it is easier to find close substitutes for narrowly defined
goods. For example, food, a broad category, has a fairly inelastic demand because there are
no good substitutes for food. Ice cream, a narrower category, has a more elastic demand
because it is easy to substitute other desserts for ice cream. Vanilla ice cream, a very narrow
category, has a very elastic demand because other flavors of ice cream are almost perfect
substitutes for vanilla.
Time Horizon: Goods tend to have more elastic demand over longer time horizons. When the
price of gasoline rises, the quantity of gasoline demanded falls only slightly in the first few
months. Over time, however, people buy more fuel efficient cars, switch to public
transportation, and move closer to where they work.

Calculation of Price Elasticity of Demand:

PED is a measure of the sensitivity (or responsiveness) of the quantity of a good or service
demanded to changes in its price. The formula for the coefficient of price elasticity of
demand for a good is:
Q
P
P2P1
( 2+P1 )/2
Q 2Q 1
( 2+Q 1)/2

Quantity
Relative ChangeQuantity Demanded Average Quantity
Ed =
=
=
Relative ChangePrice
Price
Average Price

Ed =

Changequality demanded
Change price

The price elasticity of demand is commonly divided into one of five elasticity alternatives;
perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic,
depending on the relative response of quantity to price. These five alternatives form a
continuum of possibilities.
The chart displays five alternatives based on the coefficient of elasticity. The negative value
obtained when calculating the price elasticity of demand is ignored. This formula usually
yields a negative value, due to the inverse nature of the relationship between price and

quantity demanded, as described by the "law of demand". For example, if the price increases
by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and
quantity = 5%/5% = 1. The only classes of goods which have a PED of greater than 0 are
Veblen and Giffen goods. Because the PED is negative for the vast majority of goods and
services, however, economists often refer to price elasticity of demand as a positive value
(i.e., in absolute value terms).
Alternative

Coefficient (E)

Perfectly Elastic

E=

Relatively Elastic

1<E<

Unit Elastic

E=1

Relatively Inelastic

0<E<1

Perfectly Inelastic

E=0

Demand Curve and Elasticity:

As the price elasticity of demand measures how much quantity demanded responds to
changes in the price, it is closely related to the slope of the demand curve. The following rule
of thumb is a useful guide: The flatter the demand curve that passes through a given point, the

greater the price elasticity of demand. The steeper the demand curve that passes through a
given point, the smaller the price elasticity of demand.
The price elasticity of demand determines whether the demand curve is steep or flat.

Perfectly Inelastic demand:

Perfectly inelastic means that quantity demanded or supplied is unaffected by any change in
price. In other words, the quantity is essentially fixed. It does not matter how much price
changes, quantity does not budge. Perfectly inelastic demand occurs when buyers have no
choice in the consumption of a good.
Elasticity equals to 0
For example: Essential medications.

Inelastic demand:

If the price increase had no impact whatsoever on the quantity demanded, the medication
would be considered perfectly inelastic. Economics textbooks depict the demand curve for a
perfectly inelastic good as a vertical line, because the quantity demanded is the same at any
price.
E The most famous and simple example of relatively inelastic demand is that for gasoline.
As the price of gasoline increases, the quantity demanded doesn't decrease all that much. This
is because there are very few good substitutes for gasoline and consumers are still willing to
buy it even at relatively high prices
Elasticity is less than 1

Unit Elastic Demand:

Unit elastic demand describes a supply or demand curve which is perfectly responsive to
changes in price. That is, the quantity supplied or demanded changes according to the same
percentage as the change in price. A curve with an elasticity of 1 is unit elastic.

Elastic Demand:

If the value obtained by the formula is greater than 1, demand is said to be elastic, because
demand expands more than the price.

Perfectly Elastic Demand:

If demand is perfectly elastic, it means that at a certain price demand is infinite (A good with
a very high elasticity of demand). In other words if a firm increased price by 1%, it would see
all its demand evaporate. If demand is perfectly elastic, then demand will be horizontal.
Elasticity equals to infinity.

The relationship between Total revenue and Price

elasticity:
Total revenue is calculated as the quantity of a good sold multiplied by its price. It is a
measure of how much money a company makes from selling its product, before any costs are

considered. Obviously, the goal of a company is to maximize profits, and one way to do this
is by increasing total revenue. The company can increase its total revenue by selling more
items or by raising the price.
Price elasticity of demand and total revenue are closely interrelated because they deal with
the same two variables, P and Q. If your product has elastic demand, you can increase your
revenue by decreasing the price of that good. P will decrease, but Q will increase at a greater
rate, thus increasing total revenue. If the product is inelastic, then you can actually raise
prices, sell slightly less of that item but make higher revenue. As a result, it is important for
management to know whether its product has inelastic or elastic demand.

Other Demand Elasticities:

Income Elasticity:
In economics, income elasticity of demand measures the responsiveness of the demand for a
good to a change in the income of the people demanding the good, holding all prices
constant. It is calculated as the ratio of the percentage change in demand to the percentage
change in income. Income elasticity of demand measures the relationship between a change
in quantity demanded and a change in income. The basic formula for calculating the
coefficient of income elasticity is:
Ed =

Changequantity demanded
Changereal income

Normal goods have a positive income elasticity of demand so as income rise more is demand
at each price level. We make a distinction between normal necessities and normal luxuries
(both have a positive coefficient of income elasticity).
Necessities have an income elasticity of demand of between 0 and +1. Demand rises with
income, but less than proportionately. Often this is because we have a limited need to
consume additional quantities of necessary goods as our real living standards rise. The class
examples of this would be the demand for fresh vegetables, toothpaste and newspapers.
Demand is not very sensitive at all to fluctuations in income in this sense total market
demand is relatively stable following changes in the wider economic (business) cycle.
Luxuries on the other hand are said to have an income elasticity of demand > +1. (Demand
rises more than proportionate to a change in income). Luxuries are items we can (and often
do) manage to do without during periods of below average income and falling consumer
confidence. When incomes are rising strongly and consumers have the confidence to go
ahead with big-ticket items of spending, so the demand for luxury goods will grow.
Conversely in a recession or economic slowdown, these items of discretionary spending
might be the first victims of decisions by consumers to rein in their spending and rebuild
savings and household financial balance sheets.
In other words:

A positive sign denotes a normal good

A negative sign denotes an inferior good

The income elasticity of demand for a product will also change over time the vast
majority of products have a finite life-cycle. Consumer perceptions of the value and
desirability of a good or service will be influenced not just by their own experiences

of consuming it (and the feedback from other purchasers) but also the appearance of
new products onto the market. Consider the income elasticity of demand for flatscreen color televisions as the market for plasma screens develops and the income
elasticity of demand for TV services provided through satellite dishes set against the
growing availability and falling cost (in nominal and real terms) and integrated digital
televisions.

Cross Elasticity:
In economics, the cross elasticity of demand or cross-price elasticity of demand
measures the responsiveness of the demand for a good to a change in the price of
another good. It is measured as the percentage change in demand for the first good
that occurs in response to a percentage change in price of the second good.
For example, the two goods, fuel and cars (consists of fuel consumption), are
complements; that is, one is used with the other. In these cases the cross elasticity of
demand will be negative, as shown by the decrease in demand for cars when the price
of fuel increased. Where the two goods are substituting the cross elasticity of demand
will be positive, so that as the price of one goes up the demand of the other will
increase. For example, in response to an increase in the price of carbonated soft
drinks, the demand for non-carbonated soft drinks will rise. In the case of perfect
substitutes, the cross elasticity of demand is equal to positive infinity. Where the two
goods are independent, or, as described in consumer theory, if a good is independent
in demand then the demand of that good is independent of the quantity consumed of
all other goods available to the consumer, the cross elasticity of demand will be zero:
as the price of one good changes, there will be no change in demand for the other
good.
It is basically, a measure of how much the quantity demanded of one good responds to
a change in the price of another good, computed as the percentage change in quantity
demanded of the first good divided by the percentage change in price of the second
good

Price Elasticity of Supply:

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change
in price. It is necessary for a firm to know how quickly, and effectively, it can respond to
changing market conditions, especially to price changes. The following equation can be used
to calculate PES.
Basically the Price Elasticity of Supply measures the rate of response of quantity demand due
to a price change. We calculate the Price Elasticity of Supply by the formula:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

Interpretation of the Price Elasticity of Supply

The price elasticity of supply is used to see how sensitive the supply of a good is to a price
change. The higher the price elasticity, the more sensitive producers and sellers are to price
changes. A very high price elasticity suggests that when the price of a good goes up, sellers
will supply a great deal less of the good and when the price of that good goes down, sellers
will supply a great deal more. A very low price elasticity implies just the opposite, that
changes in price have little influence on supply.
Often you'll have the follow up question "Is the good price elastic or inelastic between $9 and
$10". To answer that, use the following rule of thumb:

If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes)

If PEoS = 1 then Supply is Unit Elastic

If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price changes)

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoS is
always positive. In our case, we calculated the price elasticity of supply to be 3.6, so our good
is price elastic and thus supply is very sensitive to price changes.

Factors affect the elasticity of supply:

Spare production capacity:
If there is plenty of spare capacity then a business can increase output without a rise in
costs and supply will be elastic in response to a change in demand. The supply of
goods and services is most elastic during a recession, when there is plenty of spare
labor and capital resources.
Stocks of finished products and components:
If stocks of raw materials and finished products are at a high level then a firm is able
to respond to a change in demand - supply will be elastic. Conversely when stocks are
low, dwindling supplies force prices higher because of scarcity
The ease and cost of factor substitution/mobility:
If both capital and labor are occupationally mobile then the elasticity of supply for a
product is higher than if capital and labor cannot easily be switched. E.g. a printing
press which can switch easily between printing magazines and greetings cards. Or
falling prices of cocoa encourage farmers to switch into rubber production

Time period and production speed:

Supply is more price elastic the longer the time period that a firm is allowed to adjust
its production levels. In some agricultural markets the momentary supply is fixed and
is determined mainly by planting decisions made months before, and also climatic
conditions, which affect the production yield. In contrast the supply of milk is price
elastic because of a short time span from cows producing milk and products reaching
the market place.

Three Applications of Demand, Supply and Elasticity:

Can good news for farming be bad news for farmers? Why did OPEC fail to keep the
price of oil light? Does drug interdiction increase or decrease drug related crime? At
first, these questions might seem to have little in common. Yet all three questions are
about markets, and all markets are subject to the forces of supply and demand. Here
are applying the versatile tools of supply demand and elasticity to answer these
seemingly complex questions.
Can good news for farming be bad news for farmers? What happens to wheat farmers
and the market for wheat when university agronomics discover a new wheat hybrid
that is more productive than existing varieties? First we examine whether the supply
or demand curve shifts. Second, we consider which direction the curve shifts. Third,
we use the supply and demand diagram to see how the market equilibrium changes.
In this case, the discovery of the new hybrid affects the supply curve. Because the
hybrid increases the amount of wheat that can be produced in each acre of land
farmers are now willing to supply more wheat at any given price. In other words, the
supply curve shifts tot e right. The demand curve remains the same because
consumers desire to buy wheat products at any given price are not affected by the
introduction of a new hybrid. Figure shows an example of such a change. When the
supply curve shifts from S1 to S2 the quantity of wheat sold increases from 100 to
110, and the price of wheat falls from $3 to $2.
Does this discovery make farmers better off? As a first cut to answering this question,
consider what happens to the total revenue received by farmers. Farmers total
revenue is P X Q the price of the wheat times the quantity sold. The discovery affects
farmers n two conflicting ways. The hybrid allows farmers to produce more wheat (Q
rises) but now each bushel of wheat sells for less (P falls).
Whether total revenue rises or falls depends on the elasticity of demand. In practice,
the demand or basic foodstuffs such as wheat is usually inelastic because these items
are relatively inexpensive and have few good substitutes. When the demand curve is
inelastic as it in the figure, decrease in price cause total revenue to fall. You can see
this in the figure. The price of wheat falls substantially whereas the quantity of wheat
sold rises only slightly. Total revenue falls from $300 to $220. Thus, the discovery of
the new hybrid lowers the total farmers receive for the sale of their crops.

Applications to Major Economic Issues:

One of the most fruitful arenas for application of supply-and-demand analysis
is agriculture. Improvements in agricultural technology mean that supply
increases greatly, while demand for food rises less than proportionately with
income. Hence free-market prices for foodstuffs tend to fall. No wonder
governments have adopted a variety of programs, like crop restrictions, to
prop up farm incomes.
A commodity tax shifts the supply-and-demand equilibrium. The tax's
incidence (or impact on incomes) will fall more heavily on consumers than on
producers to the degree that the demand is inelastic relative to supply.
Governments occasionally interfere with the workings of competitive markets
by setting maximum ceilings or minimum floors on prices. In such situations,
quantity supplied need no longer equal quantity demanded; ceilings lead to
excess demand, while floors lead to excess supply. Sometimes, the
interference may raise the incomes of a particular group, as in the case of
farmers or low-skilled workers. Often, distortions and inefficiencies result.

Elasticity in the real world:

We've seen how elasticity can affect changes in price and quantity in a market
economy on a graph, but do this actually happen in the real world? While it is
unlikely that demand for very many goods is perfectly elastic or perfectly
inelastic, economists recognize that demand for certain goods will be more
elastic than others, and demand for certain goods will be less elastic. So, while
the extreme cases are pretty rare, elasticity still has some effect over market
behavior.
Goods with very elastic demand tend to be non-necessary goods, or goods that
can be easily substituted for by other goods. When the prices of these goods
go up, consumers will either decide they don't really need the goods, and won't
buy any, or they will begin to substitute away from the goods, buying more of
the cheaper substitutes. One possible example of a non-essential good might
be candy. It is not an essential good, and if the price were to double, demand
would probably fall a good deal as consumers decide they don't really need to
eat candy, especially since it costs so much money. An easily substituted good
might be cola. If the price of one brand of cola increases, demand will drop
quickly as consumers decide to buy a competing brand, whose price has
stayed the same.
Goods with very inelastic demand tend to be goods with no easy substitutes, or
essential goods that consumers cannot do without. For these goods, even when
the price increases, demand stays relatively steady, because consumers have
no other options, and feel that they still need to buy the same amount of goods.
In the short run, gasoline could be considered an inelastic good, since it is

difficult to completely alter transportation patterns in an immediate response

to changes in gasoline prices. (Over the long run, however, consumers may
change their habits and decrease their consumption of gasoline, using public
transportation or carpools, once they realize that their costs have increased
permanently). Another example might be staple foods. While luxury items
such as caviar or Belgian chocolates aren't essential to our diet, basics such as
bread, pasta, and rice are relatively indispensable. In other words, an increase
in price would have less effect on the consumption of staple foods than it
would have on luxury foods.

Powerful Effects of Elasticity:

Many real estate markets are affected by an aspect of consumer behavior
and sometimes supplier behavior that involves people making rapid, often
unexpected, responses to situations they want to avoid. I call this the elastic
adjustment factor. It affects what people do in housing and office markets.
The most common elastic adjustment occurs in rental housing markets during
economic slowdowns. Many renters living alone during prosperity can no
longer afford to do so when economic adversity strikes so they double up,
or return to their parents' homes. This causes a bigger drop in demand for total
rental units during recessions than may be justified by demographic factors or
the shrinkage of available jobs alone.
Poor households immigrating to the United States into high-cost housing also
make similar adjustments. California has the highest housing costs in the
nation, yet it receives more poor immigrants than any other state. How can
they afford to live in California's expensive units? They double up, with
multiple families living in a unit designed and legally limited to one
family.
That is why Southern California has more illegally overcrowded units than
any other place in the nation. Such behavior also occurs in large cities that
received many poor immigrants in the 1990s.
The arrival of such newcomers has stimulated housing markets in cities
ranging from New York to Chicago to Fresno, Calif. But housing demand
often does not rise nearly as much as the number of new immigrant
households because so many are sharing accommodations. In addition, many
poor immigrants from abroad are now moving directly into older suburbs, as
in Arlington County, Va.
Apartment Sector Isn't Alone
Elastic adjustment also is prevalent in the office sector, where tenants are
marketing excess space that they no longer need or can afford. Some industry
observers estimate that nearly 15% of all office space on the market today is
sublease space. When the market softened, experts' difficulty in projecting just
how large an elastic adjustment would take place in the office sector led many

of them to underestimate the real vacancy rate by considering only unrented

space.
One result of elastic adjustments is that economic forecasts regarding housing
and office occupancy or behavior are often mistaken because they do not
allow for such adjustments.
For example, many believe that high housing prices have led to a housing
price bubble that will soon burst and be followed by plunging housing values
because we are now in a period of economic weakness.
But this forecast does not take into account the ability of existing homeowners
to elastically adjust to declines in market demand. Faced with the prospect of
selling their homes at reduced pricing levels in a sluggish economy, most
homeowners will likely wait until market conditions improve before putting
their house on the block. This ability of homeowners to hold out for their
desired price keeps home values from plunging even during periods of
dwindling demand.
High-Cost Housing
Another housing manifestation of elastic adjustment occurs on the supply side
of high-cost housing markets. Owners of existing units start adding accessory
apartments to their homes or garages often illegally because the demand
for lower-rent housing is so acute in places such as Honolulu and Nassau
County, N.Y. Local authorities often look the other way because they know
low-income households need accommodations that are not otherwise
available.
Thus, before making key investment decisions in any property market, it is
essential to take into account what elastic adjustments either consumers or
suppliers may make that will not show up in economic models or direct
measurements of demand.

Conclusion
Elasticity is one of the most important concepts in neoclassical economic
theory. It is useful for understanding the distribution of wealth and
different types of goods as they relate to the theory of consumer choice. Not
only that, having a good grasp on it helps us understand how the economy and
market works and how it can be affected by simplest of things.

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http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
http://www.citeman.com/10447-three-applications-of-supplydemand-and-elasticity.html
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