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What are three common misconceptions about elasticity?

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Elasticity is a key concept in economics that measures how responsive one variable is to changes in another variable. For example, price elasticity of demand measures how much the quantity demanded of a good or service changes when its price changes. Elasticity is important for understanding how markets work, how consumers and producers behave, and how policies affect outcomes. However, there are some common misconceptions about elasticity that can lead to confusion or errors. In this article, we will discuss three of them and explain why they are wrong.

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Shakeel Jeeroburkan ACSI

Snr Fund Accountant at Fidelity International - Masters in Investment Fund Administration Candidate - 1st Class Honours…
Hamilton Feijó

Certified Economist | 100X ?? Linkedin Top Voice | Innovation and Strategy Specialist | Business Manager | Corporate…

1 Misconception 1: Elasticity is the same as slope

One common misconception is that elasticity is the same as the slope of a demand or supply curve. This is not true, because slope measures the absolute change in one variable per unit change in another variable, while elasticity measures the percentage change in one variable per percentage change in another variable. For example, a demand curve with a constant slope of -2 means that for every one unit increase in price, the quantity demanded decreases by two units. However, the elasticity of this demand curve varies along its length, because the percentage changes in price and quantity depend on their initial values. For example, if the price increases from 1 to 2, the quantity demanded decreases from 10 to 8, and the elasticity is -50% / 100% = -0.5. But if the price increases from 5 to 6, the quantity demanded decreases from 6 to 4, and the elasticity is -33.3% / 20% = -1.67. Therefore, elasticity is not the same as slope, and it is not constant along a linear demand or supply curve.

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Shakeel Jeeroburkan ACSI

Snr Fund Accountant at Fidelity International - Masters in Investment Fund Administration Candidate - 1st Class Honours Financial Services Analytics (1.1) - 2023 Apprentice of the Year National Award Winner (Finance)
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Another aspect often overlooked is that elasticity can provide valuable insights into consumer behaviour that slope alone cannot. For instance, elasticity helps to understand the intensity of consumer reaction to price changes. A product with high elasticity indicates that consumers are quite sensitive to price changes, which can be important when setting prices. In contrast, slope provides a more limited view, failing to account for the consumer's capacity for change at different price points. Therefore, recognising this enables a more sophisticated application of economic principles, particularly in pricing strategies, market entry, and competitive analysis.

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2 Misconception 2: Elasticity is fixed for a good or service

Another common misconception is that elasticity is fixed for a good or service, regardless of the context or situation. This is not true, because elasticity depends on several factors that can vary over time or across markets. For example, the price elasticity of demand for a good or service depends on factors such as the availability of substitutes, the proportion of income spent on it, the time horizon, and the nature of preferences. For example, the price elasticity of demand for gasoline may be low in the short run, because consumers have limited options to reduce their consumption or switch to alternative modes of transportation. However, the price elasticity of demand for gasoline may be higher in the long run, because consumers can adjust their behavior or adopt new technologies that reduce their dependence on gasoline. Similarly, the price elasticity of demand for a good or service may differ across countries or regions, depending on the local conditions and preferences. For example, the price elasticity of demand for coffee may be higher in countries where coffee is a luxury good than in countries where coffee is a staple good. Therefore, elasticity is not fixed for a good or service, and it can change depending on the circumstances.

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Hamilton Feijó

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Elasticity is often misunderstood. Specifically, the misconception that it is fixed for a good or service is common. For example, demand for a product may be more sensitive to price changes in a prosperous economy than in a recession. Recognizing this variability is fundamental to accurate economic analysis.

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3 Misconception 3: Elasticity is always positive

A third common misconception is that elasticity is always positive, meaning that an increase in one variable leads to an increase in another variable, and vice versa. This is not true, because elasticity can be positive, negative, or zero, depending on the direction and magnitude of the response. For example, the price elasticity of demand is usually negative, meaning that an increase in price leads to a decrease in quantity demanded, and vice versa. However, the price elasticity of supply is usually positive, meaning that an increase in price leads to an increase in quantity supplied, and vice versa. Moreover, some elasticities can be zero, meaning that there is no response at all. For example, the price elasticity of demand for a perfectly inelastic good is zero, meaning that the quantity demanded does not change when the price changes. Similarly, the income elasticity of demand for a necessity good is zero, meaning that the quantity demanded does not change when the income changes. Therefore, elasticity is not always positive, and it can have different signs or values depending on the type and degree of responsiveness.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Shakeel Jeeroburkan ACSI

Snr Fund Accountant at Fidelity International - Masters in Investment Fund Administration Candidate - 1st Class Honours Financial Services Analytics (1.1) - 2023 Apprentice of the Year National Award Winner (Finance)
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Misconception 4: Elasticity is constant across all price ranges Consumer price sensitivity often fluctuates with the price itself. Products at lower prices may be deemed essential, attracting a less elastic demand. However, as prices increase, these goods can transform into perceived luxuries and demand may become more elastic as buyers weigh alternatives. This shift is tied to diminishing marginal utility, as each additional unit's perceived value lessens with increased consumption. Recognising that elasticity is dynamic, not static, is important for effective pricing and taxation decisions.

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What are three common misconceptions about elasticity?

1

2

3

4

1 Misconception 1: Elasticity is the same as slope

2 Misconception 2: Elasticity is fixed for a good or service

3 Misconception 3: Elasticity is always positive

4 Here’s what else to consider

Economics

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What are three common misconceptions about elasticity?

1

2

3

4

1 Misconception 1: Elasticity is the same as slope

2 Misconception 2: Elasticity is fixed for a good or service

3 Misconception 3: Elasticity is always positive

4 Here’s what else to consider

Economics

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