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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.

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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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