Definition

Elasticity measures the effect of a 1 percent change in an explanatory variable on the dependent variable. This is calculated as the percentage change in Y (the dependent variable) divided by the percentage change in X (the explanatory or independent variable). Elasticities tend to differ when measured at different points on the regression line. The mean elasticity is the mean average of the elasticities at these different points.

Elasticities are useful because they are unit-free. This means that they provide a more accessible means of interpreting and explaining the effects of causal variables, for example, to senior management.

A high elasticity indicates that the dependent variable is highly responsive to changes in the explanatory variable.