Elasticity

The scale to which a supply or demand curve reacts to an alteration in the price is the elasticity curve, which may be different between products, as some goods are more essential to people than others. When the product is a necessity, it is considered more likely to have its price changed, as people would continue buying it despite price increases. However, when the good or service is not considered necessary, a price increase will discourage people to buy it, as the opportunity cost will become too high.

A product or service is considered highly elastic if a minor change in its price results to a significant change in the quantity demanded or supplied. Meanwhile, an inelastic good or service is one in which price changes don’t alter or slightly alter the supply and demand levels. To determine the elasticity of supply and demand, the simple equation is used:

ELASTICITY = % CHANGE IN QUANTITY

% CHANGE IN PRICE

It is very important for businesses to gather information about the price elasticity of demand (PED) and the price elasticity of supply (PED). The company will gain a depth knowledge about its internal operations and products cost as well as the external environment, therefore helping to forecast sales, the impact of altering its price, and among other course of actions. In addition, elasticity can tell the company how competitive it is in the market, also allowing the company to generate more revenue and profits.

The PED shows the relationship between price and quantity demanded, providing an accurate calculation of the effect of an alteration in the price or demand. The equation that calculates the PED is given as:

PED = % CHANGE IN QUANTITY DEMANDED

% CHANGE IN PRICE

Suppose that the price of newspaper increas...

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...than one, the price elasticity supply is elastic; therefore, the company is responsive to changes in price, leading it into a competitive advantage over its rivals. While the coefficient for PES is positive in value, it may range from 0, perfectly inelastic, to the infinite, perfectly elastic (Economics Online). In other words, there are three extreme cases of PES:

• Infinite supply at one price = Perfectly elastic;

• Only one quantity can be supplied = Perfectly inelastic;

• In the graph, it is the linear supply curve coming from the origin = Unit elasticity

The way that companies are keen to respond to changes in market conditions has to be carefully analysed, whereas the company must consider if the resource inputs are readily available, the mobility of workers, availability of stock room, if the production is at its full capacity as well as the production cycle.