Elasticities of Supply and Demand

  

Rubber bands aren’t the only thing that have elasticity in your day-to-day life. Elasticities of supply and demand tell us how likely we are to change our behavior (i.e., the quantity of whatevers that we've bought) in response to changes in something else (usually price).

The more sensitive we are to price changes, the more elastic we are in the quantity we buy. The less sensitive we are to price changes, the more inelastic we are in the quantity we buy. Ferrari buyers: Highly insensitive to price; buyers of gasoline: Highly sensitive to price.

If you’re in the grocery store and see that your fave ice cream is on sale, does that make you buy two instead of one? If so, your elasticity of demand for that cream-of-the-crop ice cream is high. If not...well...you’re hard as nails, and you have inelastic demand for that ice cream. One is enough, you say.

Not enough parking is an example of inelastic supply that we all love to hate. Sometimes there’s a high demand for parking and just not enough spaces. Even as the demand rises...increasing what people are willing to pay to snag a spot to park their hunk of metal...the supply remains stoic and unchanging. It’s not that parking supplies want parking spaces to be inelastic when demand rises...they just don’t have the ability to make more parking. Yet.

Related or Semi-related Video

Finance: What is Elastic v Inelastic Dem...19 Views

00:00

And finance Allah Shmoop What is elastic versus in elastic

00:06

demand Okay well here's your underwear band I think the

00:12

bane of wedgies super wedgies atomic wedgies and over the

00:17

head mega glop wedgies all around the globe Well what

00:20

do they all have in common Stretchy nous The band

00:23

stretches and moves and gives goodness Well think about the

00:26

elastic as representing the marketplace for a paperback copy of

00:31

Moby Dick It's the same new paperback copy Freshly minted

00:35

with that you know new book smell It's the same

00:38

product whether you bite it Amazon or Barnes and Noble

00:41

or anywhere else for both people you know who shop

00:45

anywhere else and or Barnes and Noble Or at walmart

00:48

dot com which has thirty for more buyers than Barnes

00:51

and Noble So yeah that's the second place winner in

00:54

the book war saga Well Moby Dick here we go

00:57

Yeah same total commodity product and lots of sellers of

01:00

it So the volumes sold depending almost entirely on price

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rather than well if the price of that book drops

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like two percent while you just buy it wherever wherever

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it's sold cheaper right total commodity So the curves move

01:12

around like elastic A buyer will go to the area

01:15

of least resistance price resistance And yeah it's like you

01:19

know what happens in that atomic super wedgie thing So

01:22

if elastic means no pricing power of the cellar and

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likely very low margins for the cellar and a world

01:31

where the buyer has all the power than what in

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elastic All right well it's when you try to do

01:37

an atomic wedgie on some dude wearing steel underwear like

01:41

you know this guy sirloin of beef Well then it

01:44

doesn't move The material is in elastic An elastic would

01:48

be the sole remaining copy of Moby Dick signed by

01:51

Melville himself and still with a little whale blubber oil

01:55

on the manuscript cover there There's only one copy in

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the world and hundreds of billionaires all around the world

02:01

who read or maybe just care about important literature would

02:05

love that copy Could they sell it for fifty bucks

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A thousand one hundred thousand A million shore Probably Sure

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sure sure All the power then is with the one

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seller of that product who can charge almost anything they

02:17

want when they go to sell it So think of

02:19

any elastic demand is being things you can't live without

02:23

Like that last drink of water fore a parched human

02:26

traveller in the desert You know prices go up or

02:28

down like this curve or line thing here and it

02:31

won't matter Buyers will pay and sellers will reap the

02:35

powered rewards of any elasticity Pull on a rubber band

02:38

for a while and it'll move It'll adjust your pressure

02:41

and if you crinkle up a thousand of these bad

02:43

boys and melt him to gather well they'll bounce for

02:45

a long time I think of them as being elastic

02:48

They move a lot just like markets Okay so let's

02:51

think about oil What about that Yeah highly elastic when

02:54

there's lots of supply While the highly competitive industry will

02:58

offer a gallon of gas for less and less and

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less and less until it has sold out all the

03:03

marginal gas it can supply and still at least break

03:07

even All things considered so typically highly elastic industry sell

03:10

commodities where there's no difference in buying a gallon of

03:13

gas from Shell or Chevron or BP Or we've got

03:17

gas dot com or whoever So now go to the

03:20

other end of the street and try pulling on this

03:23

two by four Yeah you can pull all day long

03:25

at eight going nowhere unless you're Superman It is in

03:29

elastic Any elastic demand revolves around things that are irreplaceable

03:33

like those thirty five acres on the beach in Malibu

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only exist in one place and a property like that

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comes up for sale maybe once in a decade So

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it carries any elasticity in its sales process in that

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the seller can put almost any price at once on

03:48

the property and will likely get it The same applies

03:50

to rare vintage Ferraris The signed football used to score

03:55

the winning touchdown in the Super Bowl or elite plastic

03:58

surgeons for wealthy widows of billionaires Economists being economy you

04:04

know I want to make sure that elasticity is something

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they can graph So the equation for elasticity goes something

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like this percent change in quantity to manage over percent

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change in the price There we go Well Q represents

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the quantity and P represents the price There See very

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cleverly named Take two points the quantity at point A

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and then the quantity at point B like note those

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then check the price at both of those points and

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you figure out the percentage change and we'll just get

04:32

the ratio Well the answer gives you a measure of

04:34

the products elasticity Any number bigger than one is considered

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to be elastic meaning It's kind of more commodity ish

04:42

The bigger the number the more elastic it is Like

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water A normal water in any normal city is pretty

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elastic Figures less than one answered like a point five

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point o three Two would be any elastic like the

04:54

smaller the figure the more any elastic the more rare

04:58

Ferrari buyer like it is Well the math may seem

05:01

a tad complicated here but when graphed out well it

05:03

makes a lot of sense Visually the concepts are easy

05:05

to conceive So check out these curves Yeah not very

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curvy Other factors besides simple supply and demand can play

05:12

into whether prices are elastic or any elastic Grover Bio

05:15

Genetics Inc provides a drug that cures a certain kind

05:18

of tale Cancer In dogs The drug is relatively simple

05:21

The manufacture Any moderately competent lab could produce it But

05:25

it's the consumer who feels the verticality of the demand

05:28

curves that is a dog owner whose pooch is suffering

05:32

from painful tale cancer will pay nearly anything to get

05:35

the drug needed to keep their dog alive and licking

05:38

their face will demand for the drug is very any

05:41

elastic Then right Rover Bio genetics can jack up the

05:44

price to whatever they want a jacket to and people

05:46

will pay it well The high price of the drug

05:48

has nothing to do with the manufacturing cost Remember the

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drug is relatively easy to make It has to do

05:54

with the elasticity of the demand for it Biogenetic skin

05:58

charged a high price basically because they can welcome to

06:03

the world of supply demand economics in the elasticity Yeah

06:07

other complications can come into effect as well For instance

06:10

elasticity can change on one demand curves That is to

06:14

say different forces come into play in each curve area

06:18

when determining the demand elasticity Varying considerations impact consumers at

06:23

different points like you find out that you can get

06:26

a cheap generic equivalent of the tail cancer drug in

06:30

Mexico So your pack up little snookums and head down

06:33

to Tijuana The instructions on the drugs say to give

06:35

the pop two pills orally and then make sure to

06:38

give her plenty of water But the guy's front desk

06:40

warned you that they've had some plumbing issues lately and

06:43

you might not want to drink the tap water So

06:46

you have to feed snookums bottled water Teo you know

06:48

take with her pills Now the minibar has bottled water

06:52

It cost nine dollars for this little thing Nine dollars

06:55

Can you believe it Yes Nine You don't want to

06:57

leave Snow comes alone in the hotel room So you're

06:59

tempted Teo Just pay the high minibar price But if

07:02

you just leave the room for a few minutes while

07:04

you khun go to the hotel bar You know they

07:06

sell bottled water for still a whopping six dollars each

07:09

but at least he saved three bucks And then if

07:11

you're willing to take a longer trip while you can

07:13

you know uber toe walmart to Mexico and by water

07:16

in bulk for less than a dollar a bottle So

07:19

like why wouldn't you do that Yeah because well we're

07:21

all lazy but snow comes Yeah let's give her a 00:07:24.846 --> [endTime] little kiss In the world

Up Next

Econ: What is elasticity?
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What is elasticity? Elasticity refers to the degree of demand to quality or price changes in the market to a product or service. Products or servic...

Find other enlightening terms in Shmoop Finance Genius Bar(f)