Elasticity

Elasticity measures the degree to which one variable in an economic model is responsive to changes in another variable. This concept can be applied to analysis of many economic models, but is especially useful in analysis of supply and demand. For example, demand for gasoline can be expected to decrease in relationship to increased cost. Elasticity refers to the degree to which that change in demand is related to changes in price. For example, in the 1970s, there were fewer alternatives to gasoline than there are now, so the only way for demand to be reduced was for total consumption to be reduced. Now that hybrid cars are available, they provide an additional way for consumers to reduce their demand for gasoline, and the demand can be expected to be more elastic in relationship to price.