Elasticity of Demand

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

Alfred Marshall wanted a single number that could answer a question buyers, sellers and governments all ask in different words: how much does demand for this good actually change when its price moves? In Principles of Economics, first published in 1890 and revised across eight editions over the following three decades, he supplied it, elasticity, the ratio of the percentage change in quantity demanded to the percentage change in price. A good with elastic demand, a specific brand of soft drink competing with dozens of substitutes, loses buyers fast when its price rises. A good with inelastic demand, insulin for a diabetic patient, keeps its buyers regardless. Marshall built the concept as part of a broader project synthesizing classical cost-of-production theory with the new marginal-utility economics of Jevons, Menger and Walras into what became the neoclassical mainstream, and elasticity remains one of the few pieces of first-year economics that shows up, unchanged, in central bank reports, tax policy debates and antitrust litigation alike.

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

A government levies a tax on cigarettes and announces it will raise a billion dollars from tobacco companies. In practice, the companies pay very little of it. Because demand for cigarettes is inelastic, addicted consumers keep buying at nearly the same volume even as the after-tax price rises, so sellers simply pass the tax through in higher prices and the burden lands overwhelmingly on smokers, not the industry the tax was aimed at. This is the tax-incidence principle Marshall's elasticity concept makes precise: the side of a market with the less elastic response, the side with fewer good alternatives, bears more of any tax, tariff or price-fixing intervention, regardless of which side the government formally charges. The same logic explains why a tariff on imported steel raises costs for domestic manufacturers who use steel more than it punishes foreign steel exporters who can sell elsewhere, and why rent control, a price ceiling rather than a tax, still redistributes value along the same elasticity lines between landlords and tenants. Elasticity turns a question that sounds like an accounting detail, who legally owes the payment, into the economically real question of who actually bears the cost.