Economics for Business

Ištrauka

UNDERSTANDING PRICE ELASTICITY OF DEMAND, PRICE ELASTICITY OF
SUPPLY, AND HOW THESE IMPACT TAXATION
Elastic and inelastic are economic terms used to describe changes in buyer and supplier
behavior related to price changes. Like the expansion of a rubber band, elastic refers to changes in
demand / supply that may result from the slightest change in prices, and inelastic when demand /
supply does not change even when prices change. These two concepts are quite simple and easy to
understand. This article summarizes each with clear examples of what types of products can be
elastic and elastic supply/demand.
When a change in price changes a large amount of supply or demand for a particular product,
it is called 'elastic'. Elastic goods are very price sensitive, and demand or supply can fluctuate
greatly as prices fluctuate. As the price of an elastic commodity rises, demand will fall rapidly and
supply will tend to increase, leading to higher demand and lower supply due to falling prices. These
conditions can become equal when they reach equilibrium, when demand and supply are equal (the
price at which buyers want to buy and sellers want to sell). Goods that are elastic are usually goods
that can be easily replaced with substitutes, and if the price of the goods increases, the consumer
can easily replace his replacement. For example, when the price of butter rises, consumers can
easily switch to margarine, as is the case with coffee and tea, which are also direct substitutes.
Demand elasticity is calculated as the ratio of the change in demand (percentage) to the
change in price (percentage). Demand is said to be price elastic when a change in price causes a
greater than proportional change in demand and the ratio is greater than one. Demand is inelastic to
price when the change in demand caused by a change in price is less than a certain proportional
change and the ratio is less than one. Demand can be absolutely inelastic when a change in prices
does not cause any change in demand, and absolutely elastic when goods and services are purchased
at only one constant price.
Demand for goods is affected by many factors. We will first discuss the reaction of buyers to
a change in the price of a commodity. Price change affects the amount of demand for different
goods differently. It is understood that as the price changes, so will the amount of demand for bread
or chocolate. In economic theory, the category of elasticity is used to estimate changes in the
quantity of demand as prices change. If buyers are sensitive to falling or rising prices, demand is
said to be elastic. When a buyer reacts weakly to a price change, demand is inelastic. To better
understand the reaction of buyers to changes in the price of a commodity, we will describe the
elasticity of demand to prices.