Elasticity

....... And I'm not talking rubber bands.. Okay, I am a bit.
In a lesson which I spent the better part of playing with rubber bands (and or stealing them, nothing that you can prove) we learned about price elasticity of demand or, PED.
Whilst the relevance of playing with elastic bands has to economic elasticity was lost on me, I'm sure there was a method to our teacher's madness. (And playing with a rubber band will always be fun)
I'm going to try and explain the true meaning of elasticity minus the rubber bands..
I'll try and keep this as short as possible but much like the elastic band this topic stretches out..

What exactly is elasticity?
The idea of elasticity basically comes from the effect changing one variable like, price of a good or personal income, has on another variable, usually quantity demanded.
Yes, I am aware this sounds like a demand schedule but economics just isn't that easy. (Check here for more information on demand schedules.. You're welcome Katy)
It is very similar to the idea of a demand schedule (all economics concepts are relatively similar) but it is not portrayed in a graph but rather the actual concept put into practice.


for those of you that hate maths (although why would you be on an economics blog) you may want to look away now as I'm about to go all mathematical.. 

What is the formula for elasticity?
Put in words the formula for elasticity is percentage change of quantity demanded divided by percentage change in price.
(Percentage change is new amount subtract original amount divided by original amount)
 When the answer is 0, the example is called perfectly inelastic this is almost impossible, but if it were to happen, then the revenue would go down as demand would stay the same when price was decreasing. 
If the answer is between 0 and -1, then this is called price inelastic demand, and revenue would go down a very small amount as prices fall but demand increases at a smaller rate than the price drop. 
If the answer is -1, then it's called unitary price of elasticity of demand (who?) this means that there is very little or no change to revenue as the change in price is proportionate to the change in demand. 
Finally, if the answer is bigger than -1, then revenue increases, and it's called price elastic demand as the demand changes by a higher amount than price change.

What affects elasticity?
This, my friends, brings us onto the controversial topic of tax which I feel (much like my friend Katy) should be avoided at all legal costs.. (please don't arrest me) 
Legality and offshore bank accounts aside, in elasticity there are two forms of tax, shifted tax and unshifted tax.. (Yes, I am aware this still sounds dodgy from a gangster stand point)
Shifted tax tax that a firm has to pay but offload the cost onto the consumer by increasing the price of the good and unshifted tax is the tax imposed on a firm which they have to pay off themselves, because for one reason or another they are unable to rise the price of the good or service. On a relatively elastic curve, one with a smaller gradient, there is generally less shifted tax, and more unshifted, price doesn't go up dramatically due to taxes. However, on a graph for a product with inelastic demand, then shifted tax is generally higher than unshifted, meaning that the price of the good is likely to rise to accommodate for the extra tax imposed but this is because consumers are willing to pay more.

Income elasticity of demand is a derivative of elasticity and involves the responsiveness of a good to a change in income. Income elasticity often greatly depends on whether a person earns a large or small amount of money. For example:
 Ellie earns £20 000 (making her a low earner) and has a positive income elasticity and spends £30 on ASDA groceries a week. Her income increases to £25 000 and she will be able to spend £40 a week on ASDA groceries. (Disclaimer: I am not intending any harm on the ASDA company label or those earning less than £30 000.. I love ASDA)
Dylan earns £60 000 (making him a big earner) (I'm not big headed at all) and has a negative income elasticity and so spends £5 on ASDA a week, preferring to spend his money on the luxury good of Waitrose groceries. His income increases to £65 000 and so no longer spends any money on the inferior good, ASDA groceries choosing to only buy luxury goods such as Waitrose groceries.

This is certainly one case where having the name Dylan (or Katy) and being negative (income elasticity) gets you places..