Supply and Demand
Elasticity of Demand
Elasticity of demand is a variation in price depending on the demand of a good or service. Items like vehicles, appliances, jewelry, and electronics will sell less at full price than they do when there is a drop in price. When producers and retailers drop the price enough for the market to take notice, people react in deciding to purchase the good or service. This reaction and sensitivity to the market is known as Elastic demand.
Unit Elasticity of Demand applies to single units of a good or service and occurs when a shift in price directly affects a product per unit. If the percentage of change in quantity divided by the percentage of change in price is one.
Inelastic demand happens when
Next month, both prices increase 50% so now a pencil is $.15 each and the mortgage is $1290. The lower priced item is less elastic because the price fluctuation is merely pennies. The spending habits for a pencil would not likely change. However, for the greater priced good, where the increase is hundreds of dollars at the same percentage of increase as the pencil, price elasticity would be higher and the demand would reduce.
Sudden Price Change
There are times when there is a shortage of a product due to forces beyond a producers control and the producer, in order to get what they have of that product to market, must raise prices to cover their costs and losses. This would mean that only consumers who really want only that product, brand, and will accept no substitution becomes the target purchaser while other consumers will “wait” to purchase.
If the price of the item continues to stay at the higher price, is a widely used and necessary product, people may have no choice to purchase but will change their use of the product to make it last longer. We have seen this over the past 4.5 years with gasoline. Our federal government leader has deemed gasoline “bad” and has kept production refinement and allowable domestic sales low while pushing his plan for electric cars. Most people have vehicles which use gasoline and live more than five miles from work. People may still need to purchase gasoline at