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) Inelastic 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)

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 Inelastic Elastic Inelastic Elastic 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 Inelastic Perfect Inelastic