Elasticity

How do changes in price affect supply & demand?

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 DemandInelastic Demand.

(ex. The price of Bob’s medicine doubles, but Bob still buys it every week = Inelastic Demand)

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.)

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)

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.

Demand Elasticity – the Curves

Elastic Demand Inelastic Demand Small Price Change greatly affects QD Little Change with Price Change

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

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!).

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.

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.

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!!!)

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!

The Curves Elastic Supply Curve Inelastic Supply

Curve

Perfect inelastic Supply Curve

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

Inelastic

Elastic

Inelastic

Elastic

Elastic

Inelastic

Perfect Inelastic