What is elasticity? | American News

Elasticity is a method of measuring the likelihood of one economic factor affecting another, such as when the price of an item affects consumer demand or when supply affects the cost of something.

An elastic economic factor changes relatively easily compared to a change in another factor. An inelastic economic factor changes very little when another element changes significantly.

For example, if the price of gasoline were to increase significantly, demand would not suddenly collapse. Request fuel is, in most cases, relatively inelastic. Conversely, a television is an item with relatively elastic demand – or demand that changes easily.

In most markets, if the price of a TV were to rise sharply from $500 to $700 suddenly, demand for it would drop. Indeed, the demand for television sets is elastic with respect to price.

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Elasticity is governed by the principles of supply and demand, which means that the higher the demand for an item, the more elastic its price. Elasticity dynamics are also affected by the number of alternative options in the market. In other words, when people have a lot of similar options, the price elasticity will be lower.

The price elasticity of demand measures the change in demand in response to price changes. For example, some products have a very inelastic demand, like some Lego Star Wars minifigures. While a typical Lego minifigure costs around $5, you might have to pay upwards of $100 for a Lego Luke Skywalker with a blue milk mustache due to its rarity.

If it’s Lego you’re looking for, you might have no problem paying $100 or more for the savior of the galaxy. Among many Star Wars and Lego fans, the demand for Lego Luke remains constant; it is inelastic. If fans refused to buy the figures at higher prices, demand would be elastic.

The price elasticity of supply describes how the supply of a good or service changes when its price increases or decreases. This is usually driven by producers entering or leaving markets based on the amount of money they can get for their produce.

Therefore, higher prices mean more supply and lower prices mean less supply. For example, if the price of red cabbage were to suddenly rise sharply, farmers who had not grown it might start planting the crop, thereby increasing the overall supply but lowering the price.

Business people looking to sell a product or service need to be aware of elasticity because it can affect how they price their items. Consumers should understand the principles of elasticity, as it can help them budget for items that are inelastic in demand, which may suffer unpredictable price spikes.

FAQs

No, elasticity depends on the principles of supply and demand, but it describes how changing market factors affect specific market elements, such as price and demand.

Price elasticity refers to the change in supply or demand when the price changes.

The elasticity of demand measures how demand affects the price of a good or service.

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