The
degree to which a demand or supply curve reacts to a change in price is the
curve's elasticity. Elasticity
varies among products because some products may be more essential to the
consumer. Products that are necessities are more insensitive to price changes
because consumers would continue buying these products despite price increases.
Conversely, a price increase of a good or service that is considered less of a
necessity will deter more consumers because the opportunity cost of buying the
product will become too high.
A good or service is considered to be highly elastic if a slight change in
price leads to a sharp change in the quantity demanded or supplied. Usually
these kinds of products are readily available in the market and a person may
not necessarily need them in his or her daily life. On the other hand, an
inelastic good or service is one in which changes in price witness only modest
changes in the quantity demanded or supplied, if any at all. These goods tend
to be things that are more of a necessity to the consumer in his or her daily
life.
To determine the elasticity of the
supply or
demand curves, we can
use this simple equation:
|
Elasticity = (% change in quantity / % change in
price)
|
If elasticity is greater than or equal to one, the curve is considered to be
elastic. If it is less than one, the curve is said to be inelastic.
As we mentioned previously, the demand curve is a negative slope, and if there
is a large decrease in the quantity demanded with a small increase in price,
the demand curve looks flatter, or more horizontal. This flatter curve means
that the good or service in question is elastic.
Meanwhile, inelastic demand is represented with a much more upright curve as
quantity changes little with a large movement in price.
Elasticity of supply works similarly. If a change in price results in a big
change in the amount supplied, the supply curve appears flatter and is
considered elastic. Elasticity in this case would be greater than or equal to
one.
On
the other hand, if a big change in price only results in a minor change in the
quantity supplied, the supply curve is steeper and its elasticity would be less
than one.
