3c Elasticity of Supply and Demand

EPF 3. Demonstrate knowledge of

the price system

Elasticity of Supply and Demnad

A variety of factors influence the degree to which buyers and sellers respond to price changes

What is a elasticity?Essential Question:

Elasticity

Elasticity describes the degree to which buyers and sellers respond to price changes.

The more elastic supply or demand, the more responsive consumers and producers are to price changes (e.g., prices go up 10% and quantity demand goes down by 20%).

The more inelastic supply or demand, the less responsive producers are to price changes.

Price inelasticity means that consumers or producers are not very responsive to price changes (e.g., prices go up by 10% and quantity demanded goes down by 2%).

What determines price elasticity of demand?Essential Question:

Price Elasticity of Demand

Price inelastic demand is typical for goods or services that are necessities, have no good substitutes, and/or are inexpensive relative to one’s income (e.g., insulin, electricity, salt).

Price elastic demand is typical for goods or services that are luxuries or have good substitutes (e.g., expensive cars, a brand of soft drink).

What determines price elasticity of supply?Essential Question:

Price Elasticity of Supply

Elasticity of supply is determined by the availability of the raw materials needed for production, available production capacity, and the time period required to produce more of the good or service.

For example, the supply of seats in a football stadium is fixed; thus the supply is inelastic (higher prices offered for tickets will not produce more seats in the short run).

The supply of lawn mowing service is elastic. At a higher price more people will be willing to supply the service. On the other hand, if there is an increase in the price of strawberries, farmers cannot increase their production immediately, so the supply will be inelastic