Inelasticity and Elasticity of Demand and Supply

Elasticity and Demand

The degree to which a product’s demand and supply curve react to price determines whether the good is price elastic or price inelastic.

If the demand for a good or the supply of a good does not change or changes very little when prices increase or decrease- the good is considered price inelastic. If the demand or supply does change with price then the price is considered elastic.

Demand Inelasticity

Elasticity varies among products because some products may be more essential to the consumer.

Ex: Toilet paper, gas, medicines are essentials. Their demand does not move when price changes. They

are considered inelastic.

Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases.

Another ex: is Turkey at Thanksgiving.

Demand Elasticity A good or service is considered to be highly

elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied.

Goods that have lots of substitutes are considered elastic since consumers can choose other products when the price goes up.

Goods that change when income rises are considered elastic. Ex: Luxury items.

Elastic Supply vs. Inelastic Supply

Elasticity of supply determines how fast supply responds to quantity demand and price increases.

When there is a popular product that is in short supply for instance, the price may rise as a result. The manufacturers of that product will increase output (the supply) to keep up with the demand. The higher the elasticity of supply, the faster the supply will increase when demand and price increase.

Hula Hoops are elastic- easy to produce when demand is high. Some goods/services are more supply inelastic usually due to

a supply shortage or the availability to produce quickly. Limited tickets to a concert may have a very inelastic supply. The price of the concert tickets can be raised to any amount, but because there is a fixed number of seats and tickets, the supply (of tickets sold) may not be increased by much if at all.

Question 1. Which term is used to describe the extent to

which a change in price causes a change in demand?o Supply elasticityo Marginal utilityo Diminishing returnso Demand elasticity

2. A good is considered elastic when it:o There are substituteso When there is a monopolyo When there are no substitutes