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COEFFICIENT OF ELASTICITY:
A numerical measure of the relative response of one
variable to changes in another variable. The coefficient of
elasticity is used to quantify the concept of elasticity,
including price elasticity of demand, price elasticity of
supply, income elasticity of demand, and cross elasticity of
demand. The coefficient can be calculated using the simple
endpoint or midpoint formulas or with more sophisticated
calculus and logarithmic techniques.
The coefficient of elasticity captures the elasticity response
between two variables, often with a single value. For
example, in the analysis of the market, the law of
demand relation between price and quantity is commonly
indicated with a coefficient for the price elasticity of
demand. A comparable coefficient for the price elasticity of
supply is used to indicate the law of supply relation between
price and quantity.

A General Formula

The general formula for the coefficient of elasticity between
variables A and B is given as:
coefficient of
elasticity
=
percentage change
in variable B

percentage change
in variable A
This general formula takes a more specific form for actual
calculations. One of the more common specific forms used
is the midpoint elasticity formula:

midpoint
elasticity
=
(B2 - B1)

(B2 + B1)/2

(A2 - A1)

(A2 + A1)/2

The first term on the right-hand side of the equation is the
percentage change in variable B. The second term is the
percentage change in variable A. The individual items are
interpreted as this: A1 is the initial value of A before any
changes, A2 is the ending value after A changes, B1 is the
initial value of B before any changes, and B2 is the ending
value after B changes.
Four Common Elasticitys

The most common applications for the coefficient of
elasticity are price elasticity of demand and price elasticity
of supply. Two other notable applications are income
elasticity of demand and cross elasticity of demand.


Price Elasticity of Demand: On one side of the
market is the price elasticity of demand. This is
the relative response of quantity demanded to
changes in the price. It is specified as the
percentage change in quantity demanded to a
percentage change in price.

Price Elasticity of Supply: On the other side of the
market is the price elasticity of supply. This is
the relative response of quantity supplied to
changes in the price. It is also analogously
specified as the percentage change in quantity
supplied to a percentage change in price.

Income Elasticity of Demand: This is the relative
response of demand to changes in income, or the
percentage change in demand due to a
percentage change in income. This elasticity
quantifies the buyers' income demand
determinant.

Cross Elasticity of Demand: This is the relative
response of demand to changes in the price of
another good, or the percentage change in the
demand for one good due to a percentage change
in the price of the other good. This elasticity
quantifies the other prices demand determinant.

While these four elasticitys tend to make the greatest use
of the coefficient of elasticity, whenever an elasticity
relationship between two variables needs to be quantified,
the coefficient of elasticity is bound to come into play.

Follow the Signs

The positive and negative values resulting from calculating
the coefficient of elasticity is generally important. The
negative value for the price elasticity of demand indicates
the law of demand and the positive value for the price
elasticity of supply indicates the law of supply. However, the
negative value of the demand elasticity is often ignored for
comparison with supply elasticity and easy classification
as perfectly elastic, relatively elastic, unit elastic, relatively
inelastic, and perfectly inelastic.
In contrast, the positive and negative values for income
elasticity of demand and cross elasticity of demand are
important. Positive income elasticity indicates a normal
good, and a negative value indicates an inferior. A positive
cross elasticity indicates a substitute good, and a negative
value indicates a complement good.