If we were to look at different industries we would see different outcomes from a price cut.  For example, since 1910 agricultural prices have fallen, the quantity demanded has increased, yet both income and employment in agriculture has fallen.  Conversely, computer prices have also fallen steadily since 1960.  The quantity demanded has increased and both income and employment have also increased.  How can the same action (cutting prices) have two very different effects?

The answer lies in our supply and demand model.  Recall that a change in price changes the quantity demanded.  However, the change in the quantity demanded could be more, less, or the the same as the change in price.  The responsiveness of quantity to a change in price could have different effects, like those above, from a change in price.  This measure of responsiveness is called elasticity. The concept of elasticity is used extensively in economics and this chapter will focus on the most common elasticity, the price elasticity of demand.  The principles learned here for price elasticity is applicable to all elasticities.