Elasticity: Supply and Demand and Price

Price elasticity is an important concept to understand when beginning and maintaining a business that distributes goods or services. Elasticity is the economic concept that estimates when products should be introduced to consumers, and how (provided that all other variables remain constant) demand or supply will be affected by changes in the environment that affect price (Basic Economics, 2007-2010). Depending on how the percentage demanded/supplied is affected by price differentiation will determine whether or not a good or service is considerably elastic or inelastic, providing a sound guideline for business owners.The higher the elasticity, the more the demand will change if the price varies in the competitive market.

Elasticity will be affected by environmental changes, such as shopping seasons and national economic conditions. If a product is deemed elastic, that means that people will be considerably sensitive to changes in price. If a product is inelastic, consumers will purchase the product regardless of changes in price. The equation for price elasticity is changes in percent quantity divided by the change in percent price (Economic Concepts, 2010-2012). As a business owner, it is essential to have an understanding of this concept while considering what products to offer and at what price, and what externalities could impact these throughout the year.

Price elasticity for demand is usually negative, which means that most people will look for substitutions or alternatives because they will be affected by the price change. For example, if a cost of a laptop increases by 20% and there is a 40% drop in the quantity demanded, the price elasticity for demand is -2. This means that people are less likely to purchase this product if there is a change in price. If a pack of cigarettes increase in price by 10% and there is a 5% drop in quantity demanded, it would have an elasticity of -.5, which means that although consumers are sensitive to the price change, the demand is still relatively constant (compared to the laptop scenario).If a price increases, but there is no drop in demand (for example if the price of water increases by 15% but the same number of consumers purchase it) it is considered to be inelastic, because price won’t affect a consumer’s decision to buy(Basic Economics, 2007-2010).

The laptop is the most elastic of the examples, because it is considered to be a normal good that people can wait to purchase if economic conditions are not suitable for purchase. Water is a good that people cannot live without, so an increase in price will not impact a consumer’s decision. Therefore, it is the least elastic.Elasticity is an extremely important concept for a business to master because it will encourage supplying goods that will not be affected by environmental changes.

By supplying products that people will purchase regardless of price variation, a business owner can ensure profitability that will not be drastically altered by conditions that are out of their control. For example, if the national income went up, the elasticity of items may change, because people will have more money to invest on goods and services. Products that may have seemed too elastic before, such as the laptop, will have a higher demand and consumers will not be as sensitive to the price if they have the money to spend on it. There are conditions that stem well beyond the business front that can impact elasticity, and therefore an owner needs to be conscientious of this concept in order to ensure they are providing the right goods at the right time.Price elasticity of supply follows the same concept.

It is determined by price changes in the market, and how sensitive the supply of a good or service will be in reflection of that change (Economic Concepts, 2010-2012). For example, if a hotel room increases by 20% and the quantity supplied increases by 10%, the price elasticity would calculate to be .5, meaning that suppliers will continue to offer this product regardless if the price changes on the market. If the price of health care increases by 50% and the quantity supplied increases by the same amount, the product would be considered unit elastic, meaning that price will not affect the quantity supplied.

If a price of a book increases by 10% and the quantity supplied increases by 20%, this means that the price elasticity would be 2, meaning that price has little bearing on quantity supplied. Out of these three products and services, the hotel room would be the least elastic, and the book would be the most elastic.There are a number of factors that can impact the elasticity of a product. How necessary an item is, how large or small the expenditure is, how long the product has been out and the numbers of substitutes on the market are all components that will effect on how much demand will change. A bridge toll will be inelastic, meaning the number of people wanting it will not change, because it may be a necessity expense for travel, there may be few alternative routes, and it may be just a few cents for each consumer (Basic Economics, 2007-2010).College tuitions are more inelastic.

Our society has deemed it necessary to have a degree. Regardless if tuition increases, the demand will stay relatively the same. There are few alternatives to having a college degree and therefore the market is more limited. Price fluctuation will not impact consumer demand extensively, therefore it would be considered inelastic.A bridge toll can be considered inelastic because the demand for tolls may fit these conditions. Gasoline is a product that demonstrates other economic principles.

Although consumers will pay an increase in price, the quantity demanded percentage is fluctuating due to alternatives that are being developed as competitive substitutions. Consumers have the ability to shop around for less expensive options. Gasoline is broadly defined on the market and consumers are sensitive to its price. However, it is more inelastic in the terms that it is a needed commodity that most people spend a portion of their income on.Cell phones are more elastic than gasoline or bridge tolls.

The demand varies depending on price that can be affected by environmental factors. Cell phones are a needed item for some, but there are many substitutes on the market. They have more elasticity than gasoline, because price will impact the demand. Beachfront properties are another luxury good that, if the price was to change, many consumers may decide not to opt for that product. They are not needed items, they are not part of the typical expenditures of most consumer’s income, and therefore a fluctuation in price exemplify high elasticity.

The demand will change a lot based on the price of a good, making it very elastic.Gourmet coffee and luxury vehicles have many substitutions that make it elastic. If prices were to increase, many people could shop around for an alternative. The elasticity in demand is high, and people are very sensitive to price change. Consumers can eliminate these items from their budget, and they are not a necessity.Elasticity increases when there are other options available for consumers.

For example, computers became more inelastic over the past few years because of the increase on consumer demand for technology. Since the introduction of the tablet, computer elasticity has increased because individuals can now choose another option. Fluctuations in society and product importance will all shift the demand of a product, which can alter the elasticity of a given product also.These economic principles can be applied to an individual business. If a flower shop was to open, based on the concept of elasticity, the best time of year to raise prices would be the times that the products would be the least elastic. This means major holidays such as Valentine’s Day and Mother’s Day, and wedding and prom seasons.

Consumers will purchase the flowers regardless of the price, because environmental conditions call for a change in elasticity. Although many people would forgo purchasing flowers during regular seasons if the price was too high, during prime seasons the elasticity decreases and buyers will purchase regardless of price.For example, if we look at roses, we will see a product that is in regular demand for a number of reasons. A flower store owner can assume that consumers will purchase 10 dozen roses monthly. However, during the months of February, May and June, consumer demand is higher, and therefore the flower shop owner can increase prices because the economic and environmental conditions determine that consumers will continue to purchase the product, even at a higher price.

However, if in July, when all other variables remain constant, a business owner decides that they are going to increase the price for roses; consumers may decide not to purchase the goods because they are now sensitive to the price now that there is no outside conditions present making it inelastic.Elasticity is an economic concept that needs to be explored by all business owners. It provides a benchmark for what should be supplied and what is demanded based on conditions that could affect price. A consumer or suppliers sensitivity to price can be determined by necessity, which can be affected by factors that have no bearing on economic conditions; it can be as simple as a season or a holiday.

The more elastic a good is, the more temperamental it is on the competitive market. Therefore, it is wise for business owners to increase prices for goods in peak seasons when products become more inelastic due to outside conditions.