Explain how elasticity and inelasticity work. How does this help make sense of basic supply and demand?
When we see economic terms and theories they can seem a bit overwhelming or complicated, but often they are just a scientific or mathmetical way to explain things in the world around us that most of us take for granted or chalk up to common sense.
As an example elasticity or inelasticity are the economic terms used to describe how supply and demand change with price change for different products.
If the demand or supply of a product in the marketplace is effected by a price change in a significant way it is said to be elastic. If the price change effects little change on the supply or demand of the product it is said to be inelastic.
Economist use a formula of the percentage change in demand divided by the percentage change in price. If this number is greater than one than the item is said to be elastic. If it less than 1 it is said to be inelastic. Elastic goods are therefore really responsive to price change and inelastic items show little response to the change of price in the market. Sound complicated? It is not when you look at it in real life terms and can relate it to what you se in the market around you daily. Here is where we can see it apply easily to the basics of supply and demand.
How elastic or inelastic an good is depends often in how esential it is to the consumers. Items that are seen as more essential to the buyer are more inelastic where as items that more inessential or a luxury, or have more alternatives in the face of an increase will be more elastic. Other factors in addition to the necessity of the product that can effect the elasticity or inelascity of an item to an individual is the percentage of their income the price change effects, the brand loyalty they feel, the duration of the price change.
"Price Elasticity of Demand." Wikipedia. Wikimedia Foundation, 03 Mar. 2013. Web. 05 Mar. 2013. .
A good example of inelastic supplys in the market may be shown in items like medical supplies or medicine. Though the price changes the consumer will continue to purchase at the same rate as it is usually seen as a necssity and is a highly needed item without a lot of other alternatives.
Another example of an inelastic item you may encounter in your daily life that shows the basics of supply and demand is your water bill you get from the city. The increase in prices will be paid by the consumers because of the lack of other options available and the necessity of the item.
Gasoline for your vehicle is often seen as an inelastic because even with prices of the gasoline the consumer will see it as essential and still purchase it. Let’s remember though that duration can be a factor in elasticity so if gasoline prices remain high and enough are motivated to seek other alternatives to the paying of the higher prices like carpooling, driving less, biking instead...