The market whether at local, state national, international or global level is influenced by various forces which tend to determine to a higher degree the prices of different goods and commodities. These forces which are perpetually at interplay are either human made or beyond human control and which are relied upon to determine whether a market is viable or not. The major determinants in this scenario would be supply and demand which usually go hand in hand seeing that a shift in one of these concepts may have a direct impact on the other. Additionally, these two concepts are attributed to changes in prices as well as influencing the prices of commodities in the market. The essay will delve deeper into price elasticity of supply and demand by analyzing further what the concept represents in a wide range. More so the essay will explore the factors contributing to this scenario as well as real examples of products and services to demonstrate further in these economic concepts.
Definition of terms related to price elasticity of supply and demand
The market exists in order to ensure that the goods or services required by consumers are in constant supply regardless of the prices which may vary from time to time. Elasticity, in general, is an economic term which is used to refer to the particular degree at which consumers react to change since prices to influence their supply and demand patterns. Consequently, a more elastic curve points more demand of consumer goods and services even with small changes in place while less elastic curves reveal the need to effect significant price changes to modify the quantity demanded. According to Timmerman &Stewart (2006), elasticity tends to vary from one consumer product to another depending on how essential or not that product is to a consumer. Products that are very essential are usually less sensitive to price changes since the consumers will continue to demand them in spite of price changes. On the other hand, the demand for goods that are not considered necessities will decrease with increase in prices since the consumers tend to factor in the opportunity cost associated with buying such products.
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Price elasticity is a concept used in economics to mean the distinct ratio between the change in the percentage of the quantity supplied or demanded against its percentage when it comes to change in commodities priced in terms of percentage. The demand price elasticity is described as the change in terms of percentage of the demanded quantity against its change in price in terms of percentage (Timmerman & Stewart, 2006). On the other hand, price elasticity of supplied is described as the proportionate change in the supplied commodity quantity in relation to its percentage change in price.
Types of price elasticities
There are several types of price elasticity when it comes to dealing with responsiveness towards price changes in the market which are highly dependent on the nature of the supply or the demand curves. Elastic supply or elastic demand is a kind of elasticity which indicates a very high responsiveness to change in price. Consequently, the resultant curve will be flatter meaning that consumers may reduce their intake of particular goods or services even when the prices are adjusted at a tiny percentage. If the percentage of the price change as compared to the change in quality supplied or demanded is greater than 1, then the price is very elastic.
Inelastic demand or inelastic supply is a concept used to refer to a type of elasticity where the consumers show low responsiveness in their demand or supply for commodities even with price changes. This trend is mostly witnessed in commodities which are regarded as necessities such as foodstuffs and whose demand is not affected by price changes. In this case, if the percentage of the price change as compared to the change in quality supplied or demanded is less than one then the price is very inelastic. Unitary elasticity is a type of price elasticity which indicates a proportionate responsiveness to both supply and demand of goods no matter the extent at which their prices changes. In other words, a change in a commodities price attracts an equal change when it comes to the quantity demand and the elasticity coefficient is 1 (HKEP, n.d).
Determinants of price elasticity of Supply
There are various factors which play a significant role in determining the price elasticity of supply as follows:
Time
The price elasticity of supply may become more elastic with time meaning that producers may increase the supplied quantity with a larger percentage as compared to increase in the prices of the commodities supplied (HKEP, n.d).
Marginal Cost
An increase in marginal costs due to rise in the production of one more unit may limit the rate at which production is conducted meaning that the change in the supplied quantity is less as compared to the proportionate change in prices creating an inelastic supply function.
Number of firms
A high number of companies dealing in certain commodity or services may translate to more elastic supply and vice versa.
Factors that determine price elasticity of demand
Various factors play a major role in determining the price elasticity of demand:
Substitutes
Commodities with more close substitutes are likely to have a higher elasticity since the consumers will resort to those substitutes in case of an increase in price as compared to commodities which do not have close substitutes (HKEP, n.d).
Consumers’ income levels
Higher consumer's income levels mean that the consumers can spend more on the products which translate to greater elasticity in demand.
Holds in price changes
The longer a price change tends to hold the higher the elasticity of demand especially with nondurable goods.
Calculations of price of supply and demand elasticity
Economists usually determine the price elasticity of goods and services by the use of midpoint method for elasticity which is basically the average change in the percentage of both the supplied and demanded quantities as well as the price. This formula is preferable as it enables the economists to get the same price elasticity between any two price points in the curve with either an incidence of a decrease or an increase in the price of commodities and services.
Calculating the price elasticity of supply
Price elasticity of supply is calculated by dividing the change in quantity supplied in terms of percentage by its corresponding change in price.
Change in quantity supplied (%)
Price Elasticity of Supply = _______________________________
Change in price (%)
Example
Movie tickets price changed from $ 9 to $ 10 while the quantity supplied changed from 75 to 105 respectively. Calculate the price elasticity of supply.
Solution
The percentage change in supply is (105-75)/75 = 0.4 while the percentage change in price is (10-9)/9 = 0.1111. Thus the price elasticity of supply is 0.4/0.1111 = 3.6 indicating a very elastic price.
Calculating the price elasticity of demand
The price elasticity of demand is calculated by dividing the change in quantity demanded in percentage terms against the resultant change in percentage in a commodities quantity price hence:
Price elasticity for demand = Change in quantity demanded (%)
_______________________________________
Change in quantity price (%)
Example
The price of a burger increased from increased from $20 to $22, while the quantity of burgers which was demanded d from 100 to 87 units. Calculate the burgers’ price elasticity for demand.
Solution
In this case, the price of the burger increased from $ 20 to $ 22 which reflects a 0.1 or 10 per cent change (2/20) while the quantity demanded fell by - 0.13 or 13 percent (13/100).therefore the price elasticity of demand equals to:
-13/10 = - 1.3 which translates to an elastic type of price elasticity of demand.
In conclusion price elasticity of supply and demands are economic terms used in describing the overall effects of changes in prices on demand and supply of goods and services. As such, some products are sensitive to even slight changes in prices while others are not. These differences are determined by various factors including marginal cost, number of firms, consumer’s levels of income and the presence of substitutes among other factors. The price elasticity of supply in demand can thus be elastic, inelastic or unitary depending on the discussed determinants as well as other market forces at interplay.
References
HKEP. (n.d). Price elasticity of demand & supply. New Horizon Economics – 4B Essential Revision Handbook . Retrieved on 1 September 2017 from http://www.hkep.com/economic/www/student/sources/HB_4B_10_01e.pdf.
Timmerman, J. E. & Stewart, J. D. (2006). Extending the pedagogical attention given elasticity of demand in marketing. Journal of Economics and Finance Education, 5(1), 14-25.
