ABSTRACT
In this chapter, the authors introduce the concept of elasticity. Elasticity measures the responsiveness of economic actors to changes in market factors, including price and income. When income elasticity is positive but less than 1, demand is called income inelastic. When the income elasticity is positive and greater than 1, a good is called income elastic. Demand for a good is price inelastic if the effect of a price change on the quantity demanded is fairly small. For a good with perfectly inelastic demand, such as lifesaving drugs and basic foodstuffs, profit incentives may be at odds with social well-being. A common application of elasticity estimates is predicting how a company's revenues will change in response to a price change. One case in which demand tends to be very elastic in the real world is in the market for general-skilled labour, when general-skilled workers are plentiful.
