2.06. Elasticity of Demand

0:006. Elasticity of Demand The demand schedule tells us how many units of the purchased good will be bought at each hypothetical price. From this schedule we may easily find the total number of units of the sale good that will be expended at each price. If three horses are demanded at a price of 95 barrels of fish, then the total number of units of the sale good that will will be offered in exchange, will be 3 times 95, or 285 barrels of fish. This then is the total outlay of the sale good that will be offered on the market at that price.

0:45Outlay equals price times quantity demanded of purchase good. But we know that as the price decreases, the demand must either increase or remain the same. Therefore, a decrease in price tends to be counteracted by an increase in quantity, and as a result, the total outlay of the sale good may either increase or decrease as the price changes. For any two prices, we may compare the total outlay of the sale good that will be expended by buyers. If the lower price yields a greater total outlay than the higher price, the total outlay Outlay is defined as being elastic over that range. If the lower price yields a lower total outlay than the higher price, then the outlay is inelastic over that range. Alternatively, we may say that the former case is that of an elasticity greater than unity, the latter of an elasticity less than unity, and the case where the total outlay is the same for for the two prices is one of unit elasticity, or elasticity equal to one.

2:00Since numerical precision in the concept of elasticity is not important, we may simply use the terms inelastic, elastic, and, for the last case, neutral. Some examples will clarify these concepts. Thus suppose that we examine the total outlay schedule at prices of 96 and 95. At 96, the total outlay is 192 barrels. At 95, it is 285 barrels. The outlay is greater at the lower price, and hence the outlay schedule is elastic in this range. On the other hand, let us take the prices 95 and 94. At 94, the outlay is 282. Consequently, the schedule here is inelastic.

2:53There is no reason why the concept of elasticity must be confined to two prices next to each other. Any two prices on the schedule may be compared. It is evident that an examination of the entire outlay demonstrates that it is basically elastic. It is elastic over most of its range, with the exception of a few small gaps. If we compare any two rather widely spaced prices, it is evident that the outlay is less at the higher price. If the price is high enough, the demand for any good will dwindle to zero, and therefore the outlay will dwindle to zero. Contrary to what might be thought at first, the concept of elasticity of supply is not a meaningful one, as is elasticity of demand.

3:45If we multiply the quantity supplied at each price by the price, we obtain the number of barrels of fish, the sale-good, which the sellers will demand in exchange. It will easily be seen, however, that this quantity always increases as the price increases, and vice versa. The reason is that its other determinant, quantity supplied, changes in the same direction as the price, not in the inverse direction as does quantity demanded. As a result, supply is always elastic, and the concept is an uninteresting one. The attention of some writers to the elasticity of supply stems from an erroneous approach Much to the entire analysis of utility, supply and demand, they assume that it is possible to treat human action in terms of infinitely small differences, and therefore to apply the mathematically elegant concepts of the calculus, etc. to economic problems.

4:51Such a treatment is fallacious and misleading, however, since human action must treat all All matters only in terms of discrete steps. If, for example, the utility of X is so little smaller than the utility of Y that it can be regarded as identical or negligibly different, then human action will treat them as such, that is, as the same good. As a result, the seemingly precise concept of elasticity at a point, percentage increase in demand divided by a Negligibly Small Percentage Decrease in Price is completely out of order. It is this mistaken substitution of mathematical elegance for the realities of human action that lends a seeming importance to the concept of elasticity of supply, comparable to the concept of elasticity of demand.