if the supply of a good is inelastic

if the supply of a good is inelastic

if the supply of a good is inelastic

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Elasticity vs. Inelasticity of Demand: What’s the Difference?

Inelasticity and elasticity of demand refer to the degree to which demand responds to a change in another economic factor, such as price, income level, or substitute availability. Elasticity measures how demand shifts when other economic factors change. When fluctuating demand is unrelated to an economic factor, it is called inelasticity.

Price is the most common economic factor used when determining elasticity or inelasticity. Other factors include income level and substitute availability.

Elastic demand means there is a substantial change in quantity demanded when another economic factor changes (typically the price of the good or service), whereas inelastic demand means that there is only a slight (or no change) in quantity demanded of the good or service when another economic factor is changed.

The elasticity of demand is an important economic concept. This article will explore more about the concepts of elasticity and demand, and the difference between demand that is elastic and demand that is considered inelastic.

if the supply of a good is inelastic
if the supply of a good is inelastic

KEY TAKEAWAYS

  • Elasticity of demand refers to the degree in the change in demand when there is a change in another economic factor, such as price or income.
  • If demand for a good or service remains unchanged even when the price changes, demand is said to be inelastic.
  • Examples of elastic goods include luxury items and certain food and beverages.
  • Inelastic goods, meanwhile, consist of items such as tobacco and prescription drugs.
  • The elasticity of demand is calculated by dividing the percentage change in the quantity demanded by the percentage change in the other economic variable.

Definition of Price Elasticity of Supply

The price elasticity of supply is the measure of the responsiveness in quantity supplied to a change in price for a specific good.

In economics, elasticity is a summary measure of how the supply or demand of a particular good is influenced by changes in price. Elasticity is defined as a proportionate change in one variable over the proportionate change in another variable:

[latex]Elasticity \;= \; \frac{\%\; Change\; in\; quantity}{\%\; Change\; in\; price}[/latex]

The price elasticity of supply (PES) is the measure of the responsiveness in quantity supplied (QS) to a change in price for a specific good (% Change QS / % Change in Price). There are numerous factors that directly impact the elasticity of supply for a good including stock, time period, availability of substitutes, and spare capacity. The state of these factors for a particular good will determine if the price elasticity of supply is elastic or inelastic in regards to a change in price.

The price elasticity of supply has a range of values:

  • PES > 1: Supply is elastic.
  • PES < 1: Supply is inelastic.
  • PES = 0: The supply curve is vertical; there is no response of demand to prices. Supply is “perfectly inelastic.”
  • PES = [latex]\infty[/latex] (i.e., infinity): The supply curve is horizontal; there is extreme change in demand in response to very small change in prices. Supply is “perfectly elastic.”

Inelastic goods are often described as necessities. A shift in price does not drastically impact consumer demand or the overall supply of the good because it is not something people are able or willing to go without. Examples of inelastic goods would be water, gasoline, housing, and food.

if the supply of a good is inelastic
if the supply of a good is inelastic

Elastic goods are usually viewed as luxury items. An increase in price for an elastic good has a noticeable impact on consumption. The good is viewed as something that individuals are willing to sacrifice in order to save money. An example of an elastic good is movie tickets, which are viewed as entertainment and not a necessity.

The price elasticity of supply is determined by:

  • Number of producers: ease of entry into the market.
  • Spare capacity: it is easy to increase production if there is a shift in demand.
  • Ease of switching: if production of goods can be varied, supply is more elastic.
  • Ease of storage: when goods can be stored easily, the elastic response increases demand.
  • Length of production period: quick production responds to a price increase easier.
  • Time period of training: when a firm invests in capital the supply is more elastic in its response to price increases.
  • Factor mobility: when moving resources into the industry is easier, the supply curve in more elastic.
  • Reaction of costs: if costs rise slowly it will stimulate an increase in quantity supplied. If cost rise rapidly the stimulus to production will be choked off quickly.

The result of calculating the elasticity of the supply and demand of a product according to price changes illustrates consumer preferences and needs. The elasticity of a good will be labelled as perfectly elastic, relatively elastic, unit elastic, relatively inelastic, or perfectly inelastic.

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Measuring the Price Elasticity of Supply

The price elasticity of supply is the measure of the responsiveness of the quantity supplied of a particular good to a change in price.

The price elasticity of supply (PES) is the measure of the responsiveness of the quantity supplied of a particular good to a change in price (PES = % Change in QS / % Change in Price). The intent of determining the price elasticity of supply is to show how a change in price impacts the amount of a good that is supplied to consumers. The price elasticity of supply is directly related to consumer demand.

Elasticity

The elasticity of a good provides a measure of how sensitive one variable is to changes in another variable. In this case, the price elasticity of supply determines how sensitive the quantity supplied is to the price of the good.

Calculating the PES

When calculating the price elasticity of supply, economists determine whether the quantity supplied of a good is elastic or inelastic. The percentage of change in supply is divided by the percentage of change in price. The results are analyzed using the following range of values:

  • PES > 1: Supply is elastic.
  • PES < 1: Supply is inelastic.
  • PES = 0: Supply is perfectly inelastic. There is no change in quantity if prices change.
  • PES = infinity: Supply is perfectly elastic. An decrease in prices will lead to zero units produced.
if the supply of a good is inelastic
if the supply of a good is inelastic

Factors that Influence the PES

There are numerous factors that impact the price elasticity of supply including the number of producers, spare capacity, ease of switching, ease of storage, length of production period, time period of training, factor mobility, and how costs react.

The price elasticity of supply is calculated and can be graphed on a demand curve to illustrate the relationship between the supply and price of the good.

Applications of Elasticities

In economics, elasticity refers to how the supply and demand of a product changes in relation to a change in the price.

In economics, elasticity refers to the responsiveness of the demand or supply of a product when the price changes.

The technical definition of elasticity is the proportionate change in one variable over the proportionate change in another variable. For example, to determine how a change in the supply or demand of a product is impacted by a change in the price, the following equation is used: Elasticity = % change in supply or demand / % change in price.

The price is a variable that can directly impact the supply and demand of a product. If a change in the price of a product significantly influences the supply and demand, it is considered “elastic.” Likewise, if a change in product price does not significantly change the supply and demand, it is considered “inelastic.”

 

if the supply of a good is inelastic
if the supply of a good is inelastic

For elastic demand, when the price of a product increases the demand goes down. When the price decreases the demand goes up. Elastic products are usually luxury items that individuals feel they can do without. An example would be forms of entertainment such as going to the movies or attending a sports event. A change in prices can have a significant impact on consumer trends as well as economic profits. For companies and businesses, an increase in demand will increase profit and revenue, while a decrease in demand will result in lower profit and revenue.

For inelastic demand, the overall supply and demand of a product is not substantially impacted by an increase in price. Products that are usually inelastic consist of necessities like food, water, housing, and gasoline. Whether or not a product is elastic or inelastic is directly related to consumer needs and preferences. If demand is perfectly inelastic, then the same amount of the product will be purchased regardless of the price.

Economists study elasticity and use demand curves in order to diagram and study consumer trends and preferences. An elastic demand curve shows that an increase in the supply or demand of a product is significantly impacted by a change in the price. An inelastic demand curve shows that an increase in the price of a product does not substantially change the supply or demand of the product.

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