Elasticity of Supply and Demand
Elasticity is the measure of the degree to which the quantity demanded or supplied of a good or service changes in response to a change in price
IN OTHER WORDS...
The measure of how sensitive to a change in price a consumer/producer is
IN OTHER WORDS...
The measure of how sensitive to a change in price a consumer/producer is
What are the Differences?
Elasticity of Demand:
A measure of the sensitivity of consumers to a change in price
Elastic: responsive to a change in price, demand of a good or service is said to be elastic when the quantity demanded changes significantly with a change in price
Inelastic: not responsive, or only slightly responsive, to a change in price, the demand of a good or service is said to be inelastic when the quantity demanded does not change significantly with a change in price
Unitary elastic demand: a condition that exists when the percentage change in the quantity demanded of a good or service equals the percentage change in price; a demand elasticity equal to exactly 1
A measure of the sensitivity of consumers to a change in price
Elastic: responsive to a change in price, demand of a good or service is said to be elastic when the quantity demanded changes significantly with a change in price
Inelastic: not responsive, or only slightly responsive, to a change in price, the demand of a good or service is said to be inelastic when the quantity demanded does not change significantly with a change in price
Unitary elastic demand: a condition that exists when the percentage change in the quantity demanded of a good or service equals the percentage change in price; a demand elasticity equal to exactly 1
Real-Life Scenario: Toothpaste vs. Candy Bar
Inelastic: toothpaste
Elastic: candy bars
Why is that?
Well, toothpaste is an essential necessity to keep teeth clean. If the price fluctuated a little on toothpaste, most consumers would still be likely to purchase it because of its usefulness. Therefore, toothpaste is essential and inelastic. A candy bar, on the other hand, is elastic because it is more of a luxury item than an necessity. If the price went up on candy bars, it would be fairly easy to not buy them anymore. Therefore, a candy bar is inessential and elastic.
necessity to keep my teeth clean
Why is this important?
Elasticity in demand determines whether or not the object would be purchased by a consumer if there is a change in price. Some items are elastic and some are inelastic, depending on whether or not they are an necessity.
Inelastic: toothpaste
Elastic: candy bars
Why is that?
Well, toothpaste is an essential necessity to keep teeth clean. If the price fluctuated a little on toothpaste, most consumers would still be likely to purchase it because of its usefulness. Therefore, toothpaste is essential and inelastic. A candy bar, on the other hand, is elastic because it is more of a luxury item than an necessity. If the price went up on candy bars, it would be fairly easy to not buy them anymore. Therefore, a candy bar is inessential and elastic.
necessity to keep my teeth clean
Why is this important?
Elasticity in demand determines whether or not the object would be purchased by a consumer if there is a change in price. Some items are elastic and some are inelastic, depending on whether or not they are an necessity.
Elasticity of Supply:
A measure of the sensitivity of producers to a change in price
Elastic: responsive to change in price, supply of a good or service is said to be elastic when the quantity supplied changes significantly with a change in price
Inelastic: not responsive to change in price, or only slightly responsive, to a change in price, the supply of a good or service is said to be inelastic when the quantity supplied does not change significantly with a change in price
Unitary elastic supply: a condition that exists when the percentage change in the quantity supplied of a good or service equals the percentage change in price; a supply elasticity equal exactly to 1
A measure of the sensitivity of producers to a change in price
Elastic: responsive to change in price, supply of a good or service is said to be elastic when the quantity supplied changes significantly with a change in price
Inelastic: not responsive to change in price, or only slightly responsive, to a change in price, the supply of a good or service is said to be inelastic when the quantity supplied does not change significantly with a change in price
Unitary elastic supply: a condition that exists when the percentage change in the quantity supplied of a good or service equals the percentage change in price; a supply elasticity equal exactly to 1
Real-Life Scenario: Yogurt vs. Banana
Inelastic: yogurt
Elastic: bananas
Why is that?
Yogurt makers are flexible producers. They can easily make more yogurt in response to increase in price. They can also slow down the production just as fast if the price decreases. Therefore, the supply of yogurt is elastic. Growers for bananas can increase the quantity supplied by gaining more land for new plantations, but there will be a time lag between planting new banana trees and harvesting them. Therefore, until new plantations can start producing, the supply of bananas will remain mostly inelastic.
Why is this important?
Elasticity in supply determines whether or not the object's quantity supplied would change if there is a change in price. Some items are elastic and some are inelastic, depending on whether or not they are easily produced and manufactured.
Inelastic: yogurt
Elastic: bananas
Why is that?
Yogurt makers are flexible producers. They can easily make more yogurt in response to increase in price. They can also slow down the production just as fast if the price decreases. Therefore, the supply of yogurt is elastic. Growers for bananas can increase the quantity supplied by gaining more land for new plantations, but there will be a time lag between planting new banana trees and harvesting them. Therefore, until new plantations can start producing, the supply of bananas will remain mostly inelastic.
Why is this important?
Elasticity in supply determines whether or not the object's quantity supplied would change if there is a change in price. Some items are elastic and some are inelastic, depending on whether or not they are easily produced and manufactured.
Summary
Let's review elasticity in demand and supply...
Elasticity is useful in explaining whether or not a product’s quantity in demand or supply would change if the price shifted. This helps the consumers determine whether or not a product is worth their money in times of price change. It also helps producers determine whether or not they are capable of supplying more/less of their product when prices fluctuate.
Elasticity is useful in explaining whether or not a product’s quantity in demand or supply would change if the price shifted. This helps the consumers determine whether or not a product is worth their money in times of price change. It also helps producers determine whether or not they are capable of supplying more/less of their product when prices fluctuate.