Since the laws of supply and demand set
price, prices are always subject to change based upon market forces
and the interaction between the consumer and business. This change in
prices and the degree of said change is known as elasticity.

There are two types of elasticity that we
need to be concerned with. They are demand elasticity and supply

Demand Elasticity – the degree to which changes in
price effect changes in demand. Demand is elastic when a small change
in price effects a large change in demand. Such products, that show
great variability in demand are known to have elastic demand.

Demand is inelastic when a change in price does not bring about a
correspondingly large change in demand, or any change at all.
Said products are known to show inelastic demand.

How can we tell if an item is will be elastic or inelastic? The
elasticity of demand can usually be estimated by examining the
answers to three key questions. All three answers do not have to be
the same in order to determine elasticity, and in some cases the
answer to a single question is so important that it alone might
dominate the answers of the other two. Let’s examine the three

1. Can the purchase be delayed?

The ability to delay or postpone the purchase of a
product is one of the determinants of elasticity. If the purchase can
be delayed, the demand for the product tends to be elastic. If it
cannot be delayed it tends to be inelastic.

For example, since I can wait to buy a new stereo until the price
drops demand will vary greatly in accordance with price. This product
thus would tend to be elastic. Gasoline, on the other hand, I cannot
wait for. Thus demand does not vary greatly with price and the
product tends to be inelastic.

2. Are adequate substitutes available?

If a product has many substitutes, the demand for it
tends to be elastic. The fewer substitutes available for a product,
the more inelastic the demand. Note we are talking about
product not brand!

For example, if the price of coffee were to go up dramatically
then many people would switch to tea, thus a substitute is available.
Since this is the case the price is causing demand to drop. This
product would then be considered elastic. Since there is no real
substitute for gasoline of heating oil, demand remains the same
regardless of price. These products are inelastic.

3. Does the purchase use a large portion of income?

If a product is expensive, and
is a large percentage of one’s income, then the product tends to be
more elastic. If a product is not a significant portion of the income
the product tends to be more inelastic.

Take a house for example, if prices were to
drop, demand would go up alot. The same holds true for a car. A bar
of soap, steak, clothes, since even an expensive product can be
readily afforded the change in price is not a tremendous factor in

Elasticity of Supply – When supply goes up price goes down and when price
goes up supply goes down. Products are elastic if price has a large
impact on supply, they are inelastic if supply remains relatively
constant due to fluctuations in price.

Factors which effect supply elasticity are:
Price, resource costs, technology,competitive products, profit
expectations, number of sellers, natural events, taxes,subsidies and
government regulations, overproduction, flooding the market,
inability to produce an item, scarcity of natural resources.

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