Elasticity in economic supply and demand relates to the speed of movement on price, supply, and demand. It relates to the tension of market equilibrium and the tension on opposing forces to increase or decrease supply or demand at a price point. Unlike price, which can be manipulated frequently and sometimes at the point of sale, the demand and supply factors combine multiple elements to push in one direction or another. Time, including the time required to manufacture and the resources required, are constraints of rapid supply changes. For example, just as taxis and rideshare services struggle to increase supply the moment a major sporting event finishes and the stadium empties, a builder of cruise ships may take three to five years to produce one ship. This shows that supply is not able to change rapidly, even if demand increases. Yet, our demand for a hot meat pie or an umbrella can escalate in minutes as a cold, wet weather event hits the city at midday, and everyone is wet, cold, and hungry at the same time.
Welcome to Topic 4: Elasticity. In this topic, you will learn about:
- Elasticity of demand
- Elasticity of supply
- Price elasticity.
These relate to the Subject Learning Outcomes:
- Understand the microeconomic models to consider fundamental economic choices for households and firms.
- Interpret economic models, diagrams and tables to describe the economic situations.
- Explain how government policy influences microeconomic choices and macroeconomic outcomes.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Read Chapter 5 of the prescribed text – Mankiw, NG 2016, Principles of microeconomics, 8th edn., Cengage Learning Custom Publishing.
Watch the video by Clifford, J 2014, Elasticity of demand- micro topic 2.3, streaming video, YouTube.
Task: Listen carefully and take note of the key terms of:
- Supply
- Supply elasticity demand
- Demand elasticity
- Price
- Price elasticity.
Reflect on what you have learned so far in this subject. Define each of these terms in your reflective journal, ensuring that you clearly indicate the difference between each term.
You can also access the reflective journal by clicking on ‘Journal’ in the navigation bar for this subject.
Read Chapter 25: Price elasticity of supply from Microeconomics for managers by Bergman, M 2020, Pressbooks.
Task: In your reflective journal, take notes on the key takeout from this chapter. In addition, review Table 3.2 and reflect on the selected elasticity estimates. Finally, explain the relative change in quantity supplied and the relative change in price. These terms are important towards building your understanding in determining and calculating the type of elasticity present in a market.
Read the journal article by Bittermann, HJ 1934, ‘Elasticity of Supply’, The American Economic Review, 24(3):417-429.
Task: In your reflective journal, describe three (3) key takeouts from this article.
Read the following content.
Elasticity of demand
Demand can increase for a range of factors that are to do with the customers, local population, or a behavioural segment of the market (Goodwin et al 2014). For example, those who observe the Lunar New Year in Asia may demand far more moon cakes than expatriates living in Shanghai who do not. Factors that affect demand include:
- the availability of substitutes
- the rise or fall of a person's income
- whether a product is a luxury (gold watch) or necessity (rice or milk)
- a rise or fall in the price of the product made by the supplier.
Demand can also be affected by government incentives such as stimulus payments. The government, in general, may incentivise people to increase their demand for various goods. This can be through direct subsidies of the cost of producing these certain goods, for example, solar panels, or a tax on alternative and/ or substitute products. In the health sector, it is suggested a policy that governments could take, is to put a tax on snack foods that are high in sugar content as a way of encouraging cheaper healthier substitute snacks. Commercially in business, there are many incentives in markets that are aimed to increase demand. For example, if a café introduces free Wi-Fi in the café, it is likely to aim to increase the demand for coffee consumption. The following video provides details of factors that influence demand elasticity.
The elasticity of supply
The elasticity of supply should be considered in the short run to understand the elasticity of supply initially, which means what can be supplied when the demand is present (Mankiw 2018).
Imagine you are hungry at lunchtime today and you seek a hamburger, but the manufacturer supplying the hamburger meat to the store has run out. The supply is not available to meet demand. You now cannot have a hamburger for lunch. This demonstrates the supply is not available to meet the demand. Even if the shop tells you to come back tomorrow, the need (demand) goes unmet. This highlights that elasticity should be considered in the short run. The fact that the burger supply may be available in a few days does not fulfil today's demand.
Cost of production
Factors that affect the elasticity of supply include the cost of production relative to the prevailing sale price (Greenlaw & Shapiro 2011). Every year, farmers plan what they hope their fruits will be able to be sold for, and each year the cost of production is planned to be under that. From a producer perspective, if the cost of production increases, they may elect to produce less that day or season, unless they can increase the price and still have buyers. The overall number of producers, what spare capacity there is with capital, equipment and labour, the ease of switching. For example, switching from small hybrid cars to large diesel cars on a production line. The ease of storage (of goods to be supplied) including any perishability (such as for milk compared to bricks), the length of the production period if it is short or long and can adjust in time to meet demand. They all impact supply outcomes. For instance, winter jacket manufactures must determine if they can increase supply before and during the peak demand period but before the weather warms up again. The time period of training or upskilling must be considered. For example, there are insufficient doctors available in many areas, and it takes many years to train to be a doctor compared to the time taken to learn to deliver a pizza as a delivery driver. So, the supply of delivery drivers is more flexible than that of doctors.
External factors
Supply can be influenced by factors outside the control of the supplier. Most significantly this can be by a government policy decision. A supplier wanting to open a second gun shop, another nuclear power station, a new crematorium or a nightclub will have to deal with a wide range of government policies and regulations that affect how many and where such businesses may be allowed to operate. For example, none of these businesses would be allowed to open next to a kindergarten school in a residential neighbourhood. Government regulations and policies may prevent this. Thus, supply is restricted and constrained.
Government intervention
Government intervention may be aimed to achieve benefits for the overall population and society such as regulating against opening a new coal mine. Preventing a coal mine opening may lead to other manufacturers increasing the production of solar panels. To increase the solar panels' supply additionally, the government may offer a subsidy for solar electricity. This would incentivise consumers to buy solar panels to access cheaper solar power at home.
The following video provides details of the seven (7) factors and influences on supply within a market.
Price elasticity
It is critical for any vendor, supplier, or government service provider to understand the market's response to a change in price. The elasticity of price measures and defines the elasticity of price in a particular market (Greenlaw & Shapiro 2011).
If the price goes down, then demand goes up, you might think? There are, however, more options, determinants, and types of responses we need to understand. For example, getting it wrong with over or underestimating the optimal quantity supplied may result in shortages, a glut of supply, or spiralling demand or prices. These can lead to inflation.
To better understand this concept and how it impacts marketing, production, and sales, for her Harvard Business Review article, Amy Gallo talked about elasticity with Jill Avery, a senior lecturer at Harvard Business School.
Learning Task 1: Price elasticity
Read the following article by Gallo A, 2015, A Refresher on price elasticity, Harvard Business Review, August 21.
Task: After reading the article, identify, in your reflective journal, various products that you believe have significant elasticity of price (two (2) product examples) and also examples that exhibit inelasticity of price (two (2) product examples).
Learning Task 2: Supply elasticity
Oil has been one of the most in-demand commodities traded globally and has been subject to significant swings in price and supply through the last 60 years. Supply has historically been very influenced by OPEC (Organization of the Petroleum Exporting Countries) who at times consciously reduce the level of oil production.
Read the Business Insider online article to better understand elasticity in the market for oil.
Graffeo, E 2021, Oil could jump above $100 for the first time since 2014 next year as demand soars, Bank of America says, Business Insider.
Task: From the article, identify and write and answer in your journal why OPEC would wish to reduce or constrain the supply of oil production? Try to identify another sector or production where manufacturers may have similar supply reductions or control. Please be aware that some industries/manufacturers may not be as transparent with controlling production or supply as OPEC.
Learning Task 3: Demand elasticity
Task: Watch the video from CNBC news channel and identify the elasticity dynamics and the implications of financial subsidies or tariffs and their effects on price.
CNBC Television 2020, Huge supply and demand imbalance in oil markets: Mizuho managing director, CNBC, streaming video, YouTube.
In reviewing the video, it is important to consider the subsidies and tariffs effect on price which occurs within the local end market in a similar way domestically as it does internationally. In your reflective journal answer the following four (4) questions:
- A tariff has an adverse impact on buyers in what way?
- A tariff has an adverse impact on suppliers in what way?
- A subsidy has a positive impact on the supplier in what way?
- A subsidy has a positive impact on buyers in what way?
Note any queries that may arise about international economics which are covered in later topics. Note these queries in your reflective journal for future reflection.
Knowledge check
Complete the following task.
Key Takeouts:
Congratulations, we made it to the end of the fourth topic! Some key takeouts from Topic 4:
- Many markets are regularly in equilibrium. Some markets are almost never in equilibrium.
- As demand and supply move in response to price, we can see and calculate the degree of sensitivity of supply and demand to price changes.
- Elasticity is an essential concept for any organisation wishing to manage supply, influence demand or respond to demand, and adopt pricing that achieves business objectives.
- The elasticity of prices is firstly considered at an individual product or service level. Above that, we can see macroeconomic implications when a product and its supply and demand are sufficiently national or international to be triggering macroeconomic consequences such as inflation. An escalating petrol price is such a product that may have micro-economic and macro-economic implications as a local and global commodity with its particular elasticity conditions.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking ‘Join’ to enter the class.
Click here to access your seminar.
The learning tasks are listed below. These will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
Discuss how the determinants of price elasticity, supply elasticity and demand elasticity work and how they are influenced by individuals and by the government.
Work in a breakout room assigned by your lecturer and present back to the class your answers.
- What options exist for the government if they seek to reduce demand for a product that has relative price elasticity?
- What are factors that are external to the supplier’s control which may affect a supplier's willingness to supply goods which are highly elastic in the price?
Having read chapter 4 of Mankiw (2016) based on the ice-cream market examples as illustrated through pp. 62-82 Figures 1-12, you are to be prepared to identify and discuss any illustrations of the five (5) types of "zones of elasticity”, Avery identified (as cited by Gallo in HBR 2015).
You are to identify amongst the ice-cream market diagrams (Fig 1-12) which of these diagrams may be examples of any of the five “zones of elasticity” identified by Avery. Answer by identifying which of the diagrams for ice cream show any of the five types of elasticity, specifying which type of elasticity the diagram shows.
Hint: all five “zones of elasticity” may not be present among the 12 diagrams, and some may be present several times.
Welcome to your post-seminar learning tasks for this week. Please ensure you complete these after attending your scheduled seminar with your lecturer. Your lecturer will advise you if any of these are to be completed during your consultation session. Click on each of the following headings to read more about the requirements for each of your post-seminar learning tasks.
Prepare a list of key terms from this topic in your reflective journal.
You can access the activities by clicking on the following links. You can also navigate to the forum by clicking on 'ECO100 Subject Forum' in the navigation bar for this subject.
- Topic 4, Forum activity 1: Elasticity
- Topic 4, Forum activity 2: Price and demand elasticity
Review and reflect on your individual learnings from the topics tested as included in the first two (2) quizzes linked to Assessment 1.
- How did you go?
- What did you learn?
- Where can you improve?
- What lingering questions do you have?
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
- Chapter 6: Dean, E, Elardo, J, Green, M, Wilson, B & Berger, S 2017, Principles of microeconomics - Scarcity and social provisioning, Open Oregon Educational Resources
- Chapter 4: Goodwin N, Harris,, Nelson, JA, Roach, B & Torras, M 2014, Microeconomics in Context, 3rd edn., New York: ME Sharpe.
- Chapter 6: Greenlaw, SA & Shapiro, D 2017, Principles of Macroeconomics, OpenStax.
- Chapter 5: McConnell, CR, Brue, SL & Flynn, SM 2009, Economics: principles, problems, and policies, 18th edn., McGraw-Hill Irwin.
References
- Bergman, M 2021, Microeconomics for Managers, Pressbooks.
- Bittermann, HJ, 1934, ‘Elasticity of supply’, The American Economic Review, 24(3): 417-429.
- Clifford, J 2020 Elasticity of demand- micro topic 2.3, streaming video, YouTube, https://www.youtube.com/watch?v=HHcblIxiAAk
- CNBC online video 2020, Huge supply and demand imbalance in oil markets: Mizuho managing director, streaming video, YouTube, https://www.youtube.com/watch?v=TH9ErCgbhTw
- Gallo, A 2015, ‘A Refresher on price elasticity’, Harvard Business Review, https://hbr.org/2015/08/a-refresher-on-price-elasticity
- Graffeo, E 2021, Oil could jump above $100 for the first time since 2014 next year as demand soars, Bank of America says Business Insider online, Business Insider, https://markets.businessinsider.com/news/stocks/oil-prices- jump-demand-soars-supply-100-level-opec-commodity-2021-6
- Mankiw, NG 2016, Principles of microeconomics, 8th edn., Cengage Learning Custom Publishing.
