Key Takeaways
- Price elasticity indicates how sensitive demand or supply is to price changes.
- High demand elasticity means demand drops sharply with a price increase.
- Products deemed inelastic show little demand change despite price shifts.
- Supply elasticity factors include substitute availability and production time.
The price elasticity of a product describes how sensitive suppliers and buyers are to changes in price. It doesn’t change in relation to supply and demand, but it defines the slope of each curve. Price elasticity impacts both consumers and producers, with goods demonstrating varying elasticities causing different reactions to price changes. Substitute goods and time considerations can contribute to determining elasticity,
You can calculate price elasticity of supply by dividing the percentage change in supply by the percentage change in price.
Price Elasticity and Supply Demand Curves
A product with high price elasticity of demand will see demand fall sharply when prices rise. For the product with high elasticity of demand, the downward-sloping demand curve appears flatter, and for every change in price, there is a large change to the quantity demanded. A demand curve for a product with low elasticity appears to be steeper because the quantity demanded doesn’t change much, even if prices do. Products with low price elasticity are described as being inelastic.
Factors Influencing Price Elasticity of Demand
Products with high price elasticity are generally non-staple goods. For example, the demand for teeth-whitening kits may be highly dependent on price and thus fairly elastic. The demand for toothpaste, on the other hand, might be relatively inelastic regardless of whether the price changes. A key factor affecting demand elasticity includes the availability of substitute goods or goods that are very close to the product in question.
The time a consumer has to ponder options and the classification of goods also matter. For example, a consumer might drive around shopping for the best deal on items that consistently take large portions of a budget, such as groceries, while ignoring price differentials for small and relatively infrequent purchases, such as shoe polish.
Calculating Price Elasticity of Supply
Similarly, a product with high price elasticity of supply has a flatter, upward-sloping curve. A product with a low elasticity of supply has a steeper curve. Price elasticity of supply can be calculated by dividing the percentage change in supply by the percentage change in price. The same factors that affect the elasticity of demand affect supply elasticity, namely the availability of substitute inputs and the time needed to make changes to production.
The Bottom Line
High price elasticity of demand results in a greater change in quantity demanded with price changes, while low elasticity indicates less sensitivity. Price elasticity affects the slope of the supply curve. It’s calculated by dividing the percentage change in supply by the percentage change in price.
Key factors affecting elasticity include the availability of substitutes and the time consumers or producers have to make decisions.