ABSTRACT
This chapter reviews the economic concept of an elasticity, describes the various types of elasticities relevant to pricing research, and discusses the factors that determine the magnitude of the elasticities. The Law of Diminishing Marginal Utility is a fundamental concept in economics. The chapter focuses on basic consumer demand theory. The classic textbook treatment of consumer demand theory shows that market demand is just the sum of the individual demands at each price level. The slope of the demand curve shows the additional dollars spent per one extra unit of the good consumed. There are two prices for every good: own-price and cross-price. The elasticity is the ratio of the relative lengths of segments of the demand curve, the lengths cut off by the ray from the origin; that is, the curve. The chapter also discusses elasticity definitions and properties. It then provides the basic discussion of elasticities.
