## What is Elasticity?

- A Sensitivity Measure
- Measures impact on a criterion variable from changes in a managerial control variable
- A percentage computation

Elasticity = – (ΔQ ÷ Q) ÷ (ΔP ÷ P)

## Point Elasticity – Interpretation

- All computations can be interpreted as follows:

An x% change in the criterion variable is associated with a 1% change in the control variable - Classification of elasticity:
- Unitary (E
_{D}= 1) - Elastic (E
_{D}= infinity perfectly elastic) - Inelastic (E
_{D}= 0 perfectly inelastic)

Arc Elasticity = (change in Q ÷ average Q) ÷ (change in P ÷ average P)

= [(Q1 – Q2) ÷ (0.5*(Q1 + Q2))] ÷ [(P1 – P2) ÷ (0.5*(P1 + P2))] - Unitary (E

## Other Types of Elasticity

- Income
- Advertising
- Cross elasticities
- In principle, an elasticity can be computed for any variable
- Managerially, we use business variables under our control

## Conclusions

- Elasticity analysis is a sensitivity approach
- Price elasticities have relatively clear profit implications
- Other elasticities require a contribution analysis to interpret the impact on profit (i.e., change in revenue minus the increased cost of management change)