Elasticity is a measure of responsiveness. For example, an economist may like to know how the quantity demanded for oil will be impacted by a 10 percent price increase. In other words, the economist is looking at how responsive the quantity demanded is to a change in price. Measuring and understanding elasticity is a very important skill that economists use when advising policy makers on the impact of establishing a new tax, or removing a current one, on the market. Also, firms can gain valuable insight on how increasing or decreasing their price will affect total revenue. The three basic categories we will focus on are price elasticity, income elasticity, and cross price elasticity. We will also take a look at elasticity in practice with its relationship to taxes.
Elasticity in Practice: a guide to the relationship between elasticity and taxes.