Elasticity I. What is Elasticity? - Missouri State University
Elasticity
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Transcript of Elasticity
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
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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