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Elasticity

Explore the concept of elasticity in economics, which measures how demand and supply respond to changes in price. Elastic demand occurs when a small price increase results in a significant drop in quantity demanded, while inelastic demand shows little change despite price hikes. Factors influencing elasticity include the availability of substitutes, necessity versus luxury distinctions, and time for adjustment. Likewise, supply elasticity impacts how producers react to price changes. This guide provides insights into elastic and inelastic cases across various products.

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Elasticity

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  1. Elasticity How do changes in price affect supply & demand?

  2. Demand Elasticity • Elasticity describes the way in which consumers react to a change in a products price. • If a small price increase causes a dramatic change in demand the product is said to have Elastic Demand. (ex. Price of movie tickets goes up $1 & demand falls by half= movie tickets have elastic demand) • If there is little change in demand, despite a rise in price the product is said to have Inelastic Demand. (ex. The price of Bob’s medicine doubles, but Bob still buys it every week = Inelastic Demand)

  3. Factors Affecting Demand Elasticity Availability of Substitutes • If there are few or no substitutes available for a good or service = inelastic demand. (Medicine, Gas, diapers, milk, cigarettes, etc.) • Other products have many substitutes & would have more Elastic Demand if the price increased. (Food items, Bottled water, Some medications*, etc.)

  4. Additional Factors affecting DEMAND ELASTICITY • Expense of Product – more expensive items tend to be more elastic, these items take more of your budget & can be sacrificed. (Ex. Clothes, Air Travel, Video Games, etc.) • Less expensive products tend to be more inelastic, these items are cheap – so most people buy them regardless of a price change. (Ex. Socks, underwear, Shampoo, etc.) • Necessities vs. Luxuries- if the product is something you need vs. something you want. (Ex. Baby Diapers– necessary / inelastic demand Rolex Watches – luxury / elastic demand)

  5. Time & Elasticity • Consumers often need time to adjust to price changes. • Demand can become more elastic over time. • Ex. Gas – Demand for gas after a price hike is inelastic, but after a few months or years consumers adjust & seek alternatives: public transportation, fuel efficient cars, etc.

  6. Demand Elasticity – the Curves Elastic Demand Inelastic Demand Small Price Change greatly affects QD Little Change with Price Change

  7. Elastic or Inelastic Demand: you decide • Product • Starbucks Coffee • New Car • Toothpaste • New Laptop • Water/Toilet resistant I-phone • Milk • Chick-fil-a chicken biscuits • Blood pressure medicine Elastic Elastic Inelastic Elastic Elastic Inelastic Elastic Inelastic

  8. Supply Elasticity • Elasticity of Supply – measure of the way suppliers respond to a price change. • Elastic Supply – producers are sensitive to price changes (Producers can quickly adjust production levels – increasing or decreasing supply!).

  9. Elastic Supply Products with elastic supply tend to be: • 1. Produced using inexpensive & widely available resources (ex. Unskilled labor, cheap raw materials, etc.) • 2. Do not require a lot of time to produce (Pizzas, Clothing, etc.) • Examples: T-shirts, posters, bumper stickers, Crocs, cheap stuff imported from developing nations, etc.

  10. Inelastic Supply • Inelastic Supply – Producers for various reasons cannot easily respond to price changes. • Producers cannot or will not change production levels when prices change. • Inelastic Products tend to be: 1. Made with expensive resources & hard to obtain resources (High Skilled labor, gold, titanium, etc) 2. Require time & high skills to manufacture (Balsamic Vinegar, China, Crystal, etc.) Examples: Rolex Watches, Fine Wine, Caviar, Hand made furniture, etc.

  11. Perfect Inelastic Supply • Perfect Inelastic Supply exists when suppliers cannot adjust production when prices change, there is a fixed supply. • Ex. Rare art, Real estate*, Antique cars (there are no more units to be supplied!!!)

  12. Elasticity & Time • Time is a key factor with supply elasticity (Same as with demand)- over time producers can usually adjust production levels to adjust to changes in price. • Ex. Even a Peach orchard can plant additional trees & with time increase production!

  13. The Curves • Elastic Supply Curve Inelastic Supply Curve • Perfect inelastic Supply Curve

  14. Elastic or Inelastic Supply: you decide Inelastic • Oranges • Tacos • New homes • Haircuts • Toothpaste • Louis Vuitton purse • The Mona Lisa Elastic Inelastic Elastic Elastic Inelastic Perfect Inelastic

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