Boingggg boinggg. Flexing your mind like it’s elastic. Ready?
Elasticity describes the price sensitivity of buyers to changes in prices. This can apply both to firms, who need supplies (raw materials) and labor (workers) and consumers (like you, Tim).
A high elasticity toward a certain good means consumers are flexible with it. Price on your fave cereal went sky-high? Eh, that’s okay...you’ll just get the off-brand version. Low elasticity, which bottoms out at completely “inelastic,” means people aren’t flexible to price changes. They’ll still buy the thing, whatever the price is. Prices of oil rise, and you need gas to drive to work? Welp. Gotta suck it up and pay for it.
Now for the short and long of it. In the short-run, demand for goods is more likely to be inelastic. Take the gas example again for getting to work. In the short-run, you’ll suck it up and pay higher gas prices, because you drive a car to work. But if gas prices stay up, or maybe even continue to rise, you may eventually switch to public transportation.
Consumers have more time to change habits in the long-run, so elasticity is more, well...elastic...in the long-run. Prices of goods at the grocery store don’t rise and fall by exact pennies according to market supply and demand, like stocks do. Rather, they’re “sticky,” since they don’t change much in the short-run, but they do rise in the long-run.
Same with elasticity: consumers are “sticky” with their demand in the short-run, but in the long-run, they’ll make bigger changes in buying behavior response to price changes.
Related or Semi-related Video
Econ: What is Income Elasticity?14 Views
and finance Allah shmoop What is income Elasticity All right
people when you get a pay raise you feel like
you're on top of the world King of a fatter
wallet With all that dough you're starting to feel more
flexible Income elasticity also known as income Elasticity of demand
is a way to measure how changes an income change
Consumer demand like incoming elasticity is calculated by taking the
percent change in demand Numinous old over old and dividing
it by the percent change in income Yeah that's what
it looks like So back to that pay raise of
yours as income rises while we can expect to see
the demand for normal goods to rise Actually that's kind
of the definition of normal goods like normal goods aren't
things you normally buy right there Just goods you want
more of when you have more money in your pocket
A normal good for you might be gourmet coffee I
gotta love that For your sister a normal good might
be more quality fashionable clothes with intentional holes ripped in
them for your weird uncle Well more income might mean
artistic statues in his backyard Yeah to each his own
But as long as you start demanding more of a
good in response to more money to pay for it
you then have a positive income elasticity for that good
which means it's a normal good For instance let's say
you got a ten percent raise which caused you to
buy five percent more coffee Well that would mean five
percent increase in demand divided by ten percent increase in
income or a positive income Elasticity of demand of a
positive point five Yeah we can smell the freshly ground
Kona right now Well let's say that a month later
your boss said psych no raise for you Bummer Well
we'd simply switch the signs It's negative five percent then
divided by that negative ten percent Ten It's still equals
a positive zero point five incoming elasticity on a graph
where quantity demand it is on the X axis right
there and income is on the Y axis well normal
goods r sloping upward The more money we have the
more of that normal good will want to buy And
the opposite of normal goods are in theory your goods
which our goods that have a negative income elasticity like
inferior goods or goods You can live without my goods
You demand less as income rises It may or may
not be true for you but for many people fast
food is an inferior good right Not because it's made
out of chicken parts in the intestine and pig hooves
but because it has negative incoming elasticity Like remember when
your boss took back that pay raise will it meant
less gourmet Kona coffee a normal good and mohr fastfood
coffee and inferior good Well the initial ten percent pay
raise had led to an eight percent decrease in your
consumption of watery Mickey D's coffee So then you calculate
the net number to you as a negative eight percent
They're divided by a positive ten percent so that gives
you a negative zero point eight income elasticity When your
boss took back to pay raise grumble grumble your income
went down and consumption of bitter burn fast food coffee
went back up positive Eight percent divided by negative ten
percent is negative point eight Okay well on the graph
inferior goods or downward sloping The more money we have
the less you know french fries that we really want
to buy What about goods you buy the same amount
of no matter what your income like things like water
and toilet paper Well on the graph If the queue
stays the same regardless of a change in income than
the curve for that good would be a straight line
upward Twenty percent raise ten percent pay cut Doesn't matter
Still the same amount of toilet paper demanded That makes
our percent change in demand on top zero since well
there was no change if you went from buying one
bundle of TP before a raise and one bundle of
TP after a raise Yeah it's a change of zero
and zero divided by anything in California and any other
state in the nation is zero Which makes sense since
the line is vertical But hey what about luxury goods
Well as it turns out luxury goods or just a
type of normal good except more expense usually a luxury
good is a normal good because it has a positive
income elasticity What makes it different Well it has to
have an incoming elasticity greater than one For example let's
say a ten percent increase in your weird uncles income
resulted in a twenty percent increase in demand for his
weird yard art In our formula that would mean positive
Twenty percent is on top and positive Ten percent is
on the bottom for an income elasticity of two Well
think about what an incoming elasticity of at least one
means Your increase in demand for good must be the
same as the increase in your income or greater What
makes luxury goods luxury is being able to afford to
buy more of something than the proportion of your increase
in income Well there are a lot of things you'd
rather by then those odd things your uncle is decorating
his yard with but well different strokes for different folks
As they say luxury is in the eye of the 00:04:52.965 --> [endTime] consumer here
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