Understanding elasticity is important because it helps us see how much people and businesses change their buying and selling when prices go up or down. Elasticity measures this change and can be divided into different types.
Price Elasticity of Demand (PED): This shows how much people’s shopping changes when prices change. We can find this out using a simple formula:
Elastic Demand: If PED is greater than 1, it means people change their buying habits a lot when prices change. For example, luxury items like designer handbags often have elastic demand. If the price goes up a lot, many people might decide not to buy them, leading to a big drop in sales.
Inelastic Demand: If PED is less than 1, it means people don’t change their buying habits much. Essential items, like insulin for diabetics, have inelastic demand because people need to buy them, no matter how much the price increases.
Price Elasticity of Supply (PES): This measures how much the amount of a product supplied changes when prices change. The formula is similar:
Elastic Supply: Some products are easy to make. When their prices rise, companies can quickly create more of them. For example, if t-shirt prices go up, manufacturers can increase production pretty fast.
Inelastic Supply: Some products take a lot of time or resources to make. For example, farm products usually have inelastic supply. If there’s a drought, farmers cannot quickly grow more crops to meet demand.
When we look at elasticity, it helps economists guess what might happen to sales when prices change. For instance, if a company raises prices on a product that has elastic demand, they might end up making less money. But if they raise prices on a product with inelastic demand, they could make more money.
So, understanding elasticity helps businesses decide how to price their products and understand how the market works better.
Understanding elasticity is important because it helps us see how much people and businesses change their buying and selling when prices go up or down. Elasticity measures this change and can be divided into different types.
Price Elasticity of Demand (PED): This shows how much people’s shopping changes when prices change. We can find this out using a simple formula:
Elastic Demand: If PED is greater than 1, it means people change their buying habits a lot when prices change. For example, luxury items like designer handbags often have elastic demand. If the price goes up a lot, many people might decide not to buy them, leading to a big drop in sales.
Inelastic Demand: If PED is less than 1, it means people don’t change their buying habits much. Essential items, like insulin for diabetics, have inelastic demand because people need to buy them, no matter how much the price increases.
Price Elasticity of Supply (PES): This measures how much the amount of a product supplied changes when prices change. The formula is similar:
Elastic Supply: Some products are easy to make. When their prices rise, companies can quickly create more of them. For example, if t-shirt prices go up, manufacturers can increase production pretty fast.
Inelastic Supply: Some products take a lot of time or resources to make. For example, farm products usually have inelastic supply. If there’s a drought, farmers cannot quickly grow more crops to meet demand.
When we look at elasticity, it helps economists guess what might happen to sales when prices change. For instance, if a company raises prices on a product that has elastic demand, they might end up making less money. But if they raise prices on a product with inelastic demand, they could make more money.
So, understanding elasticity helps businesses decide how to price their products and understand how the market works better.