Understanding Price Elasticity of Supply and Demand

Understanding the Elasticity of Supply

The elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price. The elasticity of supply is generally positive and covers a range that goes from zero (vertical supply curve) to infinity (horizontal supply curve).

Supply Response Time Frames

The decisions of the offer have three time frames: Momentary, short-term, and long-term.

• Long-run supply response: Refers to the vendor's reaction to a price change after they have made all adjustments to production that are technologically possible.
• Short-run supply response: Refers to the response of sellers to a price change after they have made some adjustments to production that are technologically possible.

Demand Elasticity and Total Revenue

If the price drops and total income increases, demand is elastic. If the price drops and total revenue decreases, demand is inelastic.

Market Dynamics for Laptops and Desktops

Other factors remain unchanged in the markets for laptops and desktops. Laptops and desktops are substitutes. If the price of a laptop goes down, the demand for desktops decreases; if the price of a desktop computer goes down, the demand for laptops decreases.

Global Workforce and Economic Performance

EU + DS: These first economic problems represent less than 16% of the global workforce but contribute 70% of the increase in performance. There are approximately 10.2 million disadvantaged youth (Jóvenes). The ILO urges countries to take measures that favor employment.

Defining Elasticity and Its Measurements

What is elasticity? It is the sensitivity found in both demand and supply.

• > 1: Elastic
• < 1: Inelastic
• = 1: Unitary
• E > 0: Normal good
• E < 0: Inferior good
• Cross-price: Substitutes and related goods (complementary).

Formula: Ep = (Q2 - Q1) / (Q1 + Q2) / (P2 - P1) / (P1 + P2). The average price and quantity provide the most accurate measure of elasticity.

The Theory of Price Elasticity

Elasticity theory suggests all companies are interested in factors that influence price and how to forecast those prices.

• The slope of a curve depends on the units used to measure price and quantity.
• The demand for pizza and the demand for soft drinks cannot be compared simply by comparing the two slopes of the curves, as they are not related. However, elasticity remains a unitless measurement of sensitivity.

Factors Determining Price Elasticity

Several factors determine the price elasticity of demand:

• Real property: Necessity versus luxury.
• Existence of close substitutes.
• Market definition.
• Time horizon.
• Proportion of income spent on the good.

Consumer Surplus and Market Goods

Consumer Surplus: This is the difference between the actual price and what consumers would be willing to pay. It is equal to the area below the demand curve and above the price.

Elasticity in Food and Housing

Food and housing are similar goods with inelastic demand. Demand is infinite when the quantity demanded changes by an infinitely large percentage in response to a slight change in price. For example, if two vending machines are located next to each other and the first is cheaper, no one will buy from the second. In this context, Elastic = infinity and Inelastic = 1.