Elasticity and Market Equilibrium
Elasticity is an important idea in microeconomics. It explains how the amount of a good that people want or that businesses provide changes when prices go up or down. This helps us understand market equilibrium. Market equilibrium happens when the amount people want to buy equals the amount that businesses want to sell at a certain price.
Price Elasticity of Demand (PED)
Price elasticity of demand shows how much people react to changes in price. We can calculate it using this formula:
Here are the different types of demand based on elasticity:
Elastic Demand (PED > 1): If the price goes up by 10%, the quantity demanded might drop by 20%. This means people are very sensitive to price changes.
Inelastic Demand (PED < 1): If the price rises by 10%, the quantity demanded might only go down by 5%. Things we really need, like medicine, often show inelastic demand.
Unitary Elastic Demand (PED = 1): When prices change, the quantity demanded changes by the same amount.
A study found that the average price elasticity of demand for all goods is about -0.53. This means, overall, demand is not very sensitive to price changes.
Price Elasticity of Supply (PES)
Price elasticity of supply tells us how much businesses change their supply when prices change. We can also represent it like this:
Here are the main types of supply based on elasticity:
Elastic Supply (PES > 1): A 10% rise in price could lead to a 15% increase in quantity supplied. This means producers are quick to respond to price changes.
Inelastic Supply (PES < 1): A 10% price increase could cause only a 3% rise in quantity supplied. This shows that some businesses are slow to change their output based on price.
Research suggests that the average price elasticity of supply across different industries is around 0.8, which means it is mostly inelastic.
Implications for Market Equilibrium
Setting Prices: The elasticity of demand and supply affects how much prices change when market conditions shift. If demand is elastic, even a small price increase can lead to a large drop in the amount people buy, moving the market back to equilibrium.
Consumer and Producer Benefits: Elasticities also impact how much benefit consumers and producers get. Understanding these can help leaders create better policies.
Predicting the Market: Knowing about elasticity helps people predict what might happen in the market. For instance, if the demand for a product is elastic and prices go up, sellers might see a big drop in sales.
In summary, looking at elasticity is key to understanding how markets work and how they come to balance, making it a crucial topic in Year 7 Economics.
Elasticity and Market Equilibrium
Elasticity is an important idea in microeconomics. It explains how the amount of a good that people want or that businesses provide changes when prices go up or down. This helps us understand market equilibrium. Market equilibrium happens when the amount people want to buy equals the amount that businesses want to sell at a certain price.
Price Elasticity of Demand (PED)
Price elasticity of demand shows how much people react to changes in price. We can calculate it using this formula:
Here are the different types of demand based on elasticity:
Elastic Demand (PED > 1): If the price goes up by 10%, the quantity demanded might drop by 20%. This means people are very sensitive to price changes.
Inelastic Demand (PED < 1): If the price rises by 10%, the quantity demanded might only go down by 5%. Things we really need, like medicine, often show inelastic demand.
Unitary Elastic Demand (PED = 1): When prices change, the quantity demanded changes by the same amount.
A study found that the average price elasticity of demand for all goods is about -0.53. This means, overall, demand is not very sensitive to price changes.
Price Elasticity of Supply (PES)
Price elasticity of supply tells us how much businesses change their supply when prices change. We can also represent it like this:
Here are the main types of supply based on elasticity:
Elastic Supply (PES > 1): A 10% rise in price could lead to a 15% increase in quantity supplied. This means producers are quick to respond to price changes.
Inelastic Supply (PES < 1): A 10% price increase could cause only a 3% rise in quantity supplied. This shows that some businesses are slow to change their output based on price.
Research suggests that the average price elasticity of supply across different industries is around 0.8, which means it is mostly inelastic.
Implications for Market Equilibrium
Setting Prices: The elasticity of demand and supply affects how much prices change when market conditions shift. If demand is elastic, even a small price increase can lead to a large drop in the amount people buy, moving the market back to equilibrium.
Consumer and Producer Benefits: Elasticities also impact how much benefit consumers and producers get. Understanding these can help leaders create better policies.
Predicting the Market: Knowing about elasticity helps people predict what might happen in the market. For instance, if the demand for a product is elastic and prices go up, sellers might see a big drop in sales.
In summary, looking at elasticity is key to understanding how markets work and how they come to balance, making it a crucial topic in Year 7 Economics.