A constant review of supply and demand allows us to identify the general directions of change in these concepts under the influence of such factors as price. It is these studies that made it possible to formulate the basic economic law - supply and demand. To specify the effect of price or any other factors, the need arose to create a universal quantitative indicator (coefficient of elasticity of supply), which would compare the price increase with a decrease in demand for goods. This term would answer the question - the specified reduction will occur quickly or slowly, strongly or weakly.
In economic theory, the coefficient of elasticity appeared late, but developed quite rapidly. Elasticity in the general concept came to the economy from the natural sciences, and for the first time this term was used by a 17th-century scientist R. Boyle in the study of gases and their properties. The concept of “elasticity” was introduced into the economic literature in the 19th century by A. Marshall from Great Britain with the subsequent development of this theory by J. Hicks (also from Great Britain) and P. Samuelson from the USA.
The term “elasticity” itself is responsible for the response rate of one variable depending on the change in another, but having a certain relationship with the first value.
Applying this indicator to various economic processes, it can be noted that there are many methods for illustrating the ability of one economic variable to respond to certain changes in another. However, the most appropriate can be considered a unified choice of units - the use of the measurement method in percent.
In quantitative terms, elasticity is calculated using the coefficient of elasticity.
Thus, the coefficient of elasticity is a measure in numerical terms that displays the percentage change in one variable as a result of a change in one percent of the other. The boundaries of the change in this indicator are from zero to infinity.
With the introduction of elasticity in economic analysis , additional opportunities appeared, namely:
- the coefficient of elasticity is a statistical tool that has long been used in the marketing research field;
- elasticity allows, in addition to measuring a particular economic process, but also explaining the final result.
In the modern economy, there is not one sphere of activity where the elasticity coefficient could not be used. For example, the theory of economic cycles, the analysis of supply and demand, economic expectation, etc.
As a general definition of elasticity, an expression is taken, represented by dividing the relative growth of the function to the relative increment of the independent variable.
There is another kind of indicators under consideration - arc elasticity, which is an approximate degree of reaction of demand or supply to the corresponding changes in income, prices and other factors.
Arc elasticity can be defined as the average elasticity or the elasticity located in the middle of the chord, which connects two points. In fact, when considering the average values of such economic indicators as price, demand, supply are taken into account.
Arc elasticity is considered when there are relatively large changes in prices or revenues. The coefficient of arc elasticity, according to the statements of D. Rubinfeld and R. Pindike, is always between two indicators of ordinary elasticity for high and low price levels.
In other words - in the case of minor changes in the estimated values, point or normal elasticity is calculated, and for large - arc elasticity.