Elasticity considers both the direction and magnitude of oneís response to specific types of change, and can be applied to a wide variety of situations. We consider whether an increase in one variable leads to an increase or decrease in another variable, but also ask questions about the extent of that increase or decrease. This is probably best explained by way of an example.
Suppose Iím interested in learning how better personal hygiene will affect my social life. Iíll measure my social life in terms of how many dates I can get in a month, and look at personal hygiene in terms of my expenditure on personal hygiene products. My first step is to start buying toothpaste. I donít buy a lot of personal hygiene stuff and so, as a result, letís say my personal hygiene expenditure increases by 50%. Over the next month, I get 100% more dates when I go from one date to two dates.
In measuring how my social life responded to this purchase, I note that two things happen:
1. There is a positive response - an increase in my personal hygiene expenditure led to an increase in my social life.
2. The response is relative large - the change in my social life was greater (in absolute value) than the change in my personal hygiene expenditure.
The second point is an example of an elastic response. Of course, I might wonder as to whether this kind of big response might continue on as I increase my personal hygiene expenditure. Letís assume that in the following month I get my back waxed. This causes my personal hygiene expenditure to increase by 75%. As a result, I get 50% more dates by going from two dates to three. Although the positive relationship continues to hold, the response is not relatively large. That is, the 50% effect is smaller than the 75% cause. Correspondingly, we would say that this response is inelastic.