6. 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.
Outlay 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.
Since 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.
There 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.
If 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.
Such 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.