Supply and Demand Elasticity

A key concept in grasping how supply and demand works is that of elasticity. It describes how supply and demand might be altered as a result of different stimuli. Elasticity can be defined as the percentage change in a variable divided by the percentage change in another variable.  This is known as arch elasticity, as it calculates elasticity over a range of different values. Point elasticity, on the other hand, utilizes differential calculus as a determining factor when it comes to locating elasticity at a certain point. Elasticity is effectively a measure of relative changes.

It can be quite useful to know how much an item that has been supplied or demanded will change according to price fluctuations. This process is referred to as the price elasticity of supply and the price elasticity of demand. If a business intends to increase the price of an item, how will this impact their sales revenue? Will the increased unit price make up for the decrease in the volume of sales? If the government of the country in which the product is being sold decides to tax a particular item, effectively contributing to a price increase, will this have an affect on the amount that is demanded?

In addition to calculating the degree of elasticity, firms can also study the slope of their curves. This is not convenient, though, as this approach has units of measurement of quantity over the monetary unit. Take for instance, a comparison between the price of gas in Europe and the United States of America. There is a complicated conversion rate between the dollar and the euro. This is why economists tend to prefer using elasticity – the relative change in percentages.

Also, elasticity goes beyond the mere slope of the function – it presents the function’s slope in a coordinate space, as a line with a constant slope that has different elasticity depending on what point it is measured from.

First Page: Supply and Demand Schedules