Elasticity of Demand is a measurement of how much quantity demanded changes in response to changes in price. Say you had a sickness where you had to take one “life pill” a day to stay alive. If the price of the pill goes from 10 cents to 10 dollars, the amount of pills you’ll buy probably won’t change much. Now compare that to a lollipop. If a lollipop went from ten cents to ten dollars, you would probably stop buying them completely.
Because your quantity demanded of the “life pill” doesn’t change a lot in response to price, it is inelastic. Necessities, such as education, health care and drugs (if you’re an addict) have inelastic demand.
Because your quantity demanded of the lollipop changes a lot in response to price, it is elastic. Luxuries, such as vacations, pay-per-view movies and lottery tickets have elastic demand.
Elasticity of demand is measured by dividing change in quantity demanded by change in price. Based on the way we label graphs, with quantity demanded on the x-axis and price on the y-axis, elasticity can be thought of as “run over rise”, where if the demand line is steeper (i.e. the run change is low and the rise change is high), then the product is inelastic. If the demand line is flatter (i.e. run change is high and rise change is low), then the product is elastic.
Elasticity of Supply is a measurement of how much quantity supplied changes in response to changes in price. Elasticity of supply depends on how easy it is to produce more quantity.
When selling my digital books, it doesn’t matter if I sell one unit or a million, Amazon’s software will be able to reproduce the book with ease. Because I can give an almost unlimited supply at any given price, the supply curve for my digitals books are very elastic (flat).
If you scalp movie tickets to me for a sold-out movie, producing more tickets for you will be difficult. You would have to trick people into giving you their tickets, which is impossible because nobody likes you. The only way you would be willing to take on the difficulty of producing a few more tickets is if I would be willing to pay a lot more. Because the quantity supplied of movie tickets increases only a little when the price I’m willing to pay increases a lot, the supply curve for your scalp tickets is inelastic (steep).
Remember that the actual price and quantity sold is determined by the interaction of supply and demand.
When demand is inelastic, a shift in supply will lead to a greater change in price than in quantity demanded.
When demand is elastic, a shift in supply will lead to a greater change in quantity demanded than a change in price.
When supply is inelastic, a shift in demand will lead to greater change in price than in quantity supplied.
When supply is elastic, a shift in demand will lead to a greater change in quantity supplied than a change in price.
You don’t have to memorize all these rules. If you can visualize different demand and supply curves, you’ll be able to figure out the effects of shifts using your reason rather than your memory.
For simplicity sake, I’ve been drawing supply and demand curves as straight lines. But in the real world, they can be more-rounded as elasticity changes at different price points.
For example, you might consider the first two meals in a day a necessity. Since you want at least that much with little consideration for price, your demand for the first two meals is inelastic. You might then consider two additional meals a luxury. Whether you get those two extra meals will depend on the price, meaning that your demand for those meals are more elastic. This results in a concave-shaped demand curve.
Another example: say you want to sell pineapples, but you’re too lazy to grow your own. You steal your pineapples from Ted’s garden instead. Getting a few pineapples a day without detection is easy (making supply elastic), but if you want to take a lot without detection, it will be hard (making supply inelastic). This results in a concave-shaped supply curve.
These two examples are specific ones. Curves can vary for different reason in different situations. To keep things simple, I will continue drawing demand and supply curves as straight lines. But remember their curviness (i.e. their changing elasticities) when you think about situations in the real world.
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