Principles of Economics/Elasticity

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Elasticity refers to the degree to which one value changes when another does. Supply and demand change with respect to price; investment and savings change with respect to interest rate. The name is "X elasticity of Y" where a change in X causes a change of magnitude (the elasticity * Y):

where

  • Pi is initial price
  • Pf is final price
  • Si is initial supply
  • Sf is final supply
  • Di is initial demand
  • Df is final demand
  • ri is initial interest
  • rf is final interest
  • Ii is initial investment
  • If is final investment
  • Si is initial savings
  • Sf is final savings

Price elasticity of demand

= \frac{ %change in D }{ %change in P } = \frac{ \frac{ D_f - D_i }{ ( D_f + D_i ) / 2 } }{ \frac{ P_f - P_i }{ ( P_f + P_i ) / 2 } }

Price elasticity of supply

= \frac{ %change in S }{ %change in P } = \frac{ \frac{ S_f - S_i }{ ( S_f + S_i ) / 2 } }{ \frac{ P_f - P_i }{ ( P_f + P_i ) / 2 } }

Interest elasticity of investment

= \frac{ %change in I }{ %change in r } = \frac{ \frac{ I_f - I_i }{ ( I_f + I_i ) / 2 } }{ \frac{ r_f - r_i }{ ( r_f + r_i ) / 2 } }

Interest elasticity of savings

= \frac{ %change in S }{ %change in r } = \frac{ \frac{ S_f - S_i }{ ( S_f + S_i ) / 2 } }{ \frac{ r_f - r_i }{ ( r_f + r_i ) / 2 } }

[edit] Cross elasticities

The elasticities mentioned above refer to one object. Cross elasticities refer to the effects of something's price, interest, etc. on something else. This comes into play with substitute and complementary goods.

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