BNET Business Dictionary
Business Definition for: Elasticity
- the measure of the sensitivity of one variable to another.
Example: In practical terms, elasticity indicates the degree to which consumers respond to changes in price. It is obviously important for companies to consider such relationships when contemplating changes in price, demand, and supply.
Demand elasticity measures how much the quantity demanded by a customer changes when the price of a product or service is increased or lowered. This measurement helps companies to find out whether demand will remain constant despite price changes. Supply elasticity measures the impact on supply when a price is changed.
The general formula for elasticity isElasticity = % change in x / % change in yIn theory, x and y can be any variable. However, the most common application measures price and demand. If the price of a product is increased from $20 to $25, or 25%, and demand in turn falls from 6,000 to 3,000, elasticity would be calculated as– 50% / 25% = – 2A value greater than 1 means that demand is strongly sensitive to price, while a value of less than 1 means that demand is not price-sensitive.
Wiktionary Definition for: Elasticity
- physics The property by virtue of which a material deformed under the load can regain its original dimensions when unloaded
- economics The sensitivity of changes in a quantity with respect to changes in another quantity.
- the quality of being elastic
- adaptability
Additional Resources
- The Brand Switching Fraction Of Promotion Effects: Unit Sales Versus Elasticity Decompositions
- This paper explores the reason for the research literature that focuses on elasticities, it derive analytical expressions that relate the decomposition of unit sales effects to the elasticity decomposition. This paper apply these expressions to obtain estimated unit sales effect decompositions from previously reported elasticity decomposition results. It shows why...
- White papers 2001-08-29
- Why Do Asset Prices Not Follow Random Walks?
- This paper analyzes the effect of non-constant elasticity of the pricing kernel on asset return characteristics. It is shown that declining elasticity of the pricing kernel can lead to predictability of asset returns and high and persistent volatility. Also, declining elasticity helps to explain the use of technical analysis and...
- White papers 2004-01-01
- Macroeconomic Performance And Poverty Reduction
- This paper investigates the link between macroeconomic performance and the change in the poverty rate among 47 episodes of growth and 52 episodes of economic downturn in developing and transition economies. It shows that, on average, i the greater the inequality, the lower the elasticity of poverty to growth, and...
- White papers 2003-04-01
- Price Elasticity of Demand for Term Life Insurance and Adverse Selection
- This paper provides an empirical estimate of "price" and "risk" elasticity's of demand for term life insurance for those who purchase some insurance. It finds that the elasticity with respect to changes in premiums is generally higher than the elasticity with respect to changes in risk. It also finds that...
- White papers 2003-08-01
- Flexible Decomposition Of Sales Promotion Effects Using Store-Level Scanner Data
- Recent studies in marketing show decompositions of sales promotion effects based on household-level scanner data. Typically, the total elasticity is decomposed into choice, timing, and quantity elastic ties. This article proposes a model that estimates standard, enhanced, and flexible decompositions based on store-level data. The standard decomposition divides the own-brand...
- White papers 2000-12-15
- Measuring The Effect Of Globalization On Labour Demand Elasticity: An Empirical Application To OECD Countries
- There are various paths through which globalization are channelled to the labour market. One of these is the effect on labour demand elasticity. Trade might induce an increase in this elasticity via a scale effect due to the increased competition on the output market and/or via a substitution effect generated...
- White papers 2003-11-01
- Tax Bases, Tax Rates and the Elasticity of Reported Income
- Tax reforms usually change both tax rates and tax bases. Using a panel of income tax returns spanning the two major U.S. tax reforms of the 1980s and a number of smaller tax law changes, the paper finds that the elasticity of income reported on personal income tax returns depends...
- White papers 2003-10-01
- The Effect of Tax-Exempt Out-of-Pocket Premiums on Health Plan Choice
- Market-based health care reform proposals typically rely on consumer choice among competing health plans, premiums paid out-of-pocket for higher priced plans, and a significant out-of-pocket premium-price elasticity of health plan choice. The predicted effect is attenuation of the out-of-pocket premium-price elasticity of health plan choice. Using 1994 data from a...
- White papers 2001-11-27
- Housing, Consumption, and Credit Constraints
- The paper tests the credit-market effects of housing wealth shocks by estimating the consumption elasticity of house price shocks among households in different age quintiles. Younger households face faster expected income growth and hence would like to borrow more than older households. It estimate consumption elasticity's from housing wealth by...
- White papers 2004-09-29
- Dying to Save Taxes: Evidence From Estate Tax Returns on the Death Elasticity
- This paper examines data from U.S. federal tax returns to shed light on whether the timing of death is responsive to its tax consequences. The paper investigates the temporal pattern of deaths around the time of changes in the estate tax system periods when living longer, or dying sooner, could...
- White papers 2001-03-01
- How Elastic Is the Firm's Demand for Health Insurance?
- This paper investigates the impact of tax subsidies on the firm's decision to offer insurance, and on conditional firm spending on insurance. The paper finds that the elasticity of offering is driven solely by small firms, for whom the elasticity is much larger, but that spending is more elastic in...
- White papers 2000-11-01
- Numerical Identification of Elasticity Coefficients for the Bending Problem
- This paper discusses a test for identifying elasticity coefficients for the bending problem. Bending is a problem of flat textiles, and its existence is demonstrated by experimental material based on coordinates of a bent sample. This paper proposes another usage of Peirce's cantilever test for determining the relationship between bending...
- White papers 2004-12-01
- Tariffs in Monopolistic Competition Models With Leisure-Consumption Trade-Off
- This note introduces a leisure-consumption trade-off into monopolistic competition models resulting in ambiguous welfare effects of tariff protection. A small tariff is welfare reducing when the terms of trade effect is smaller than an international return to scale effect. This paper derationalizes small tariffs on the basis of the traditional...
- White papers 2002-04-16
- Limited Asset Market Participation and the Elasticity of Intertemporal Substitution
- The paper presents empirical evidence based on the U.S. Consumer Expenditure Survey that accounting for limited asset market participation is important for estimating the elasticity of inter-temporal substitution. Differences in estimates of the EIS between asset holders and non-asset holders are large and statistically significant. This is the case whether...
- White papers 2002-08-16
- Tax Incidence
- This chapter reviews the concepts, methods, and results of studies that analyze the incidence of taxes. The purpose of such studies is to determine how the burden of a particular tax is allocated among consumers through higher product prices, workers through a lower wage rate, or other factors of production...
- White papers 2002-03-07
- Optimal Unemployment Insurance When Income Effects Are Large
- The optimal rate of social insurance is shown to depend positively on the size of the income elasticity and negatively on the size of the substitution elasticity. The paper estimates these elasticities using semi-parametric hazard models and variation in UI laws across states and over time. The estimates indicate that...
- White papers 2004-05-01
- Futures Prices in a Production Economy With Investment Constraints
- This document is a new stylized fact regarding the term-structure of futures volatility. It shows that the relation between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a "V-shape"'. This aspect of the data cannot be generated by basic models...
- White papers 2005-07-20
- Systematic Risk And Financial Consolidation: Are They Related?
- This article argues that firm interdependencies, as measured by correlations of stock returns, provide an indicator of systematic risk potential. It finds a positive trend in stock return correlations net of diversification effects for a sample of U.S. large and complex banking organizations over 1998-99. The finding suggests that the...
- White papers 2002-03-01
- Gains From Trade And Efficiency Under Monopolistic Competition: A Variable Elasticity Case
- This paper presents a general equilibrium model of monopolistic competition with variable demand elasticities and investigates the impact of free trade on welfare and efficiency. First, contrary to the constant elasticity case, in which all gains from trade are due to increasing product diversity, our model features gains from pro-competitive...
- White papers 2006-02-28
- Measuring Consumer And Competitive Impact With Elasticity Decompositions
- In this paper, the author discusses three methods of decomposing the elasticity of own-good demand. One of the methods, the decision-based decomposition, is useful in determining the influence of changes in consumers' decisions on the growth in own-good demand. The other two methods, the unit-based decomposition and the share-based decomposition,...
- White papers 2006-03-02
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