Definition
Elastic demand refers to a situation where the quantity demanded of a good or service is highly responsive to changes in its price. Similarly, elastic supply indicates that the quantity supplied significantly reacts to price changes. When elasticity is high, even small changes in price lead to substantial changes in quantity demanded or supplied.
Examples
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Luxury Goods: High-end items such as designer handbags or luxury cars often exhibit elastic demand. If their prices increase significantly, the quantity demanded decreases as consumers opt for more affordable alternatives.
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Non-essential Services: Services like premium streaming subscriptions (e.g., Netflix, Spotify) demonstrate elastic demand. A price hike may push consumers to cancel subscriptions or choose cheaper alternatives.
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Agricultural Products: Some agricultural products can exhibit elastic supply. For instance, if the price of a crop such as corn rises, farmers may quickly respond by planting more corn in the following season.
Frequently Asked Questions (FAQs)
What factors influence the elasticity of demand?
- Availability of Substitutes: The more substitutes available, the more elastic the demand.
- Necessity vs. Luxury: Necessities tend to have inelastic demand, while luxuries have elastic demand.
- Proportion of Income: Goods that consume a large portion of a consumer’s income tend to have elastic demand.
- Time Period: Demand generally becomes more elastic over time as consumers find substitutes.
What determines the elasticity of supply?
- Production Flexibility: Goods that can be produced quickly and at a minimal cost typically have more elastic supply.
- Time Frame: In the long run, supply is more elastic as producers have time to adjust production levels.
- Availability of Resources: The more readily available the resources, the more elastic the supply.
How is elasticity measured?
Elasticity is measured using the price elasticity of demand (PED) and price elasticity of supply (PES). The formulas are:
- Price Elasticity of Demand (PED):
PED = (% Change in Quantity Demanded) / (% Change in Price) - Price Elasticity of Supply (PES):
PES = (% Change in Quantity Supplied) / (% Change in Price)
Can elasticity be negative?
Elasticity itself is a ratio and cannot be negative. However, the value derived from the price elasticity of demand can be negative, indicating an inverse relationship between price and quantity demanded.
Related Terms
- Inelastic Demand: A situation where the quantity demanded of a good or service is less responsive to changes in its price.
- Unitary Elasticity: A situation where a change in price leads to an equal proportional change in quantity demanded or supplied.
- Cross Elasticity of Demand: A measure of how the quantity demanded of one good changes in response to a price change in another good.
- Income Elasticity of Demand: The responsiveness of demand when a consumer’s income changes.
Online References
Suggested Books for Further Studies
- “Economics: Principles, Problems, and Policies” by Campbell R. McConnell, Stanley L. Brue, and Sean M. Flynn
- “Microeconomics” by Robert Pindyck and Daniel Rubinfeld
- “Principles of Economics” by N. Gregory Mankiw
- “Intermediate Microeconomics: A Modern Approach” by Hal R. Varian
Fundamentals of Elastic Demand and Supply: Economics Basics Quiz
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