Monday, June 23, 2008

Questions about Elasticity

One of the things that I like about amateur interest in economics is that you can make sense of it without getting deep into the math.  Its not that I'm not good at math, but my dyslexia makes memorizing formulas a bit challenging.  (thank god for spell check!)

My arch nemesis in engineering school was the physics of electricity - I had a hard enough time figuring out left from right, never mind getting directions out of it.

ANYWAY, I'm having a hard time keeping elasticity of demand straight.  It would seem to me that if something had a high elasticity then demand would stay consistent regardless of the changes in price.  I understand this is wrong and my issue is just in the way that I think about the word elastic.  (demand will stretch to the price)

Is there another way to think about elasticity that will lead me in the correction direction besides realizing that the way I want to think about it is wrong?

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2 comments:

  1. Think in terms of total revenue. If demand is elastic then total revenue falls when price rises; if demand is inelastic then total revenue rises when price rises.

    Or perhaps if you framed the word "elastic" in terms of consumers: Are they "elastic" enough to stop buying the product when the price goes up?

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  2. I agree that revenue (or expenditure) is a good way to think about it.

    In addition, it is helpful to think about WHY elasticity is better than other measures of responsiveness (like slope). The slope is dependent on units. The slope of the demand curve is different if you are measuring in dollars and gallons vs. euros and liters. However, because elasticity is unitless (just one proportion change divided by another), the price elasticity of demand is the same irrespective of the units.

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