Elasticity of Demand and Supply

All right, hello, hello, everyone, and welcome to another economics lesson, this time on elasticity of demand and supply. If you are a year 11 economics student, you might not have to know this for your economics, but I like to put it in in year 11, so it makes it seem much, much easier in year 12. So let's get on behind it. Hooray for elasticity. So start off with elasticity is all about the responsiveness of supply and demand to price changes. So what that means is when the price changes, how much the quantity changes in ratio to that. So if quantity changes, if price changes by 5%, does quantity change by 10% or 20% or 1%? And basically it's saying the reason we use the word elasticity, it's how much it springs back or how much it springs away because of that. So with elasticity impacts how flat or steep a demand or supply line appears to be. So if we're to draw some really dodgy examples of it on this here. So if we had just an axis, it's about whether the line is unit elastic like we normally draw. If it is, oh, that was atrocious. Flatter, which is elastic, or weather is incredibly steep, which is inelastic. And we'll get into the reason for each of them straight after this with a lot better diagram as well. So with price elasticity of demand, sometimes it's abbreviated to ped, we have three different types. So price elasticity of demand being all about how responsive a change in price is to a change in quantity demanded. Inelastic demand occurs when the demand for a particular good or service changes less than proportionately, so it changes in price. So, for example, a 10% increase in price only leads to a 5% decrease in demand. So whenever we talk about inelastic demand, we're usually talking about anything that is a necessity or an essential item that no matter how much the price changes, you are still going to buy. So when the price changes a lot, your demand is only going to change a little bit because you need to buy that good or service. A really good example of that would be things like petrol or medicine or for people who smoke cigarettes because they're an addictive item. Every time the price of cigarettes increases, the amount of people who stop buying them is relatively small because they have inelastic demand, they keep buying them regardless of the price change. So it ends up with a steeper curve like this one we'll see at the bottom of the page here. This one here steeper because the price change causes only a little change in the overall demand. So that's been inelastic demand. With unit elastic demand, it's when the ratio of changing price to quantity are. Even if you're being asked a question about elasticity, the answer is almost never going to be unit elastic because that is a fairly unrealistic expectation that when price changes, the quantity will change the exact same ratio. But it's what we tend to use for our theoretical questions. But for the basis of all this price elasticity stuff, we're going to focus on just inelastic and elastic demand. So elastic then occurs when the demand for a good or service changes more than the change in price. So for example, a change in price by about 10% will lead to an increase in demand by 20%. So this happens a lot with non essential items or luxuries. So if you can think of anything that's a luxury that you might buy, a good or service that is for special occasions, even if you just fit your groceries, for example, when chocolate is on sale, the demand increases far more than when it's not on sale. So you end up with a flat line like this. So when I used the example the other day in the law of demand video, when the price of connoisseur ice cream goes to half price, my demand increases exponentially compared to when it's full price. When it's full price, I don't demand a single tub, but when it's half price, I demand way more. That's because it's elastic in demand. And so a 50% decrease in price might lead my demand, my quantity demand to increase by potentially 200% because it's elastic, quantity demand responds a lot more to a change in price. So factors that affect the elasticity of demand and we'll highlight them as we go. Let's go with yellow. So the type of item so we're talking about before, when things are necessities, so things you have to buy, rent, medicine, basic food, these tend to be inelastic because if the price increases, it's not going to affect your demand that much. So if the price of your rent goes up, you're probably going to keep paying it and you're not going to demand less house or less apartment because you can't, you've got to keep buying it, it's an essential item. While non essential items. So things like luxury cars, holidays and entertainment are elastic. So if you look at things, things like booking a holiday, you can, you're not just gonna the day you want to book a holiday, you're not Just gonna go online and book everything straight away. You're probably gonna wait for the prices to be good, you're gonna wait for flights to go on sale, you're gonna wait to get a good deal on accommodation because they are non essential. You can wait for the price to change and that makes it more elastic. Next up we've got substitability. What that means is how many replacements there are for that particular good or service. So if a good is really substitutable, if there are a lot of different options that you can replace it with, it tends to be more elastic. So cereals, butter, margarine, anything where there's a lot of different options of things you can replace that with are elastic. So the price isn't going to affect your decision making that much. The price changes are going to affect your decision making a lot of because you're going to purchase something else in that category while unique products. So things like petrol, eggs, things that you can't replace with something else are inelastic because if you need eggs you really have to put eggs in it, you're going to have to buy them regardless of what price they are. You could see that pretty much a large amount recently when everyone started panic buying things and eggs basically stopped being available anywhere because they were selling too quickly. When they started getting eggs back in, they weren't the cheapest available, but people were still buying them because they needed them for their cooking. And so that showed the inelastic because when the price went up, people weren't really demanding any less. Another factor that affects elasticity of demand is time period. So in the short term things tend to be more inelastic. So if you need things right now, you're going to pay whatever price it is for it. So if you needed to fly to Queensland tomorrow because you had an unwell relative, you're going to pay whatever the price those tickets are, which is a poor example at the moment because flights are not really a thing, but it works. So whereas in the long term things tend to be more elastic. So no matter what, if you can wait to buy that good or service, it's going to be more elastic because you can wait for the price to change. And time also allows buyers to find alternatives or substitutes for that good or service, we also look at the cost and relative importance. So that's all about if goods and services are going to make up a large portion of your income, they're more elastic. So if something's going to cost you a large percentage of your overall income that is going to be more elastic because you're probably going to try and wait for the price to change to purchase that good or service. Whereas if something only takes up a small percentage of your income, it tends to be inelastic. The example here being toothpicks. I don't really know anyone that buys toothpicks. But because they're so ridiculously cheap and take up such a small portion of your income, they're inelastic if the price changes. Say I'm assuming toothpicks are like a dollar for a lot of them. If it went up to a dollar and ten cents, no one's really going to change whether or not they buy them. Another example of that would be things like tinned tomatoes. If you just buy the cheapest available tinned tomatoes at like 80 cents a can, if they went up to a dollar per can, I wouldn't really notice and I'd just keep buying them exactly as they are. The last point is minor complementary items. So things that go with something you've already purchased, so demand from cheap complementary items are inelastic. So an example here being water to be used for the pool. If you get a pool, the water to put it in that pool is inelastic. You need that to be able to use that pool. If you have a coffee machine, you need coffee for that coffee machine. So suddenly coffee becomes inelastic. Anything that goes together and you need that second thing is going to be inelastic overall. Now to look at supply. So supply is just looking at how much suppliers can actually respond to a change in price. And so with demand, it's all about what affects your decision making, whether or not you can wait for goods and services, for price elasticity of supply, it's all about how quickly businesses can respond to a change in price. So with inelastic supply, this tends to occur when the quantity supplied for a particular good or service changes by a smaller proportion than the change in price. So if there's a 10% increase in price, there's only a 5% increase in the quantity supplied. For unit elastic supply, it's when they're the same, like I said before with the law of demand, or elasticity of demand doesn't really come up. Focus on inelastic and elastic. Inelastic supply occurs when the quantity supplied for a particular good or service changes by a larger proportion than the change in price. So if there is a 10% increase in price, it leads to a 20% increase in supply. And so how that looks so inelastic supply Has a nice deep line like this. Whereas elastic supply is a lot flatter. And we'll get into the reasons for that right now. So there's only three reasons that we look at with supply, which makes it a bit quicker to go through overall. So with all of these, it's about how quickly a business can respond and supply more goods and services. So it's all about whether or not they're able to do that. So the first factor that affects elasticity of supply is, is storability. So items that can be stored without deterioration, so things like wheat, wool, wine, canned goods, these are elastic. So the reason why they're elastic is that suppliers can have these stock in storage somewhere and when the prices change, they're able to quickly supply more. And one crazy thing with the pandemic at the moment is that demand increased so quickly for these staple items that are storable that they couldn't even keep up even when they can supply more. And it's only now supermarkets are starting to catch up. Whereas when suppliers can't store goods or services when they're perishable. So things like fresh fruit and vegetables, they're inelastic because they can't be stored. And services are also inelastic because you can't store a service. Resource mobility and unused capacity. So supply is more elastic if production can be quickly changed and resources move between industries and it's even more elastic if there's unused spare capacity. So if you can quickly change your production into something different that's going to be more elastic in supply for that area. You can see this at the moment with face masks. A lot of businesses and hand sanitizer, a lot of businesses that don't make these things normally have started producing them. So you've seen a lot of coffee and alcohol companies have started making hand sanitizer because resource mobility and therefore for hand sanitizer elasticity of supply has been there, it's been more elastic because of that. Same with face masks. A lot of textile companies, they might make clothing normally or make anything else, has started making face masks, both medical and non medical because there is demand for it. And they either have the resource mobility to change into that production or they have unused capacity that they can start using to produce those products. So both hand sanitizer and face masks have had elastic supply because there has been resource mobility and some unused capacity that they can then access and then produce those goods and services. Which leads into the last point, which is all about time period. In the short term, supply is generally Inelastic because it's really difficult to quickly expand supply. This ties in with what I said before about the pandemic and like staple goods going out of stock really quickly. In the short term, businesses were not able to respond to that giant increase in demand. And so that made in the short term, everything was relatively inelastic. Whereas in the long term, supply is more elastic because the availability of resources increases. So in the short term, let's use the example if you are a farmer and you are growing bananas, because I like using the example of banana farmer because it's fun to say if you are farming bananas in the short term, you can't supply more bananas because your banana farm has limited, like it takes you a long time to grow those bananas. Whereas in the long term, supply ends up being more elastic because if there's demand for bananas at your banana farm, you can grow more banana plants and therefore in the long term supply a lot more bananas. So in the short term, supply is inelastic because it's hard to supply more. But in the long term, supply is always more elastic because in the long term you can invest and expand and produce more goods and services. All right, so this has just been a quick recap on elasticity of demand and supply. If you'd like more information about any of this, feel free to send me a message, a comment, or an email and I'll help you out with that. Other than that, thank you for watching this video. I hope it was helpful and I will no doubt have more videos about economics for you soon. Thank you and have a good day. Bye.