What is Demand and Offer Elasticity?
The theory of demand and supply is important for understanding economics. There have also been many opinions which state that the price and quantity of products requested and offered have a certain relationship, while other economic factors are more likely to be constant. This article will discuss the elasticity of demand and supply.
What is mean by elasticity?
Elasticity refers to the degree of response to demand or supply that influences changes in prices. This degree shows the extent to which requests and offers react to changes in the price of a product.
Conversely, if a curve is not elastic, it is necessary to change the price more to influence changes in the number of products on the market.
When illustrated through graphics, this elasticity can be shown through demand and supply curves. A more elastic curve will be horizontal, while the non-elastic curve will be tilted or tend to be vertical.
Products that are not elastic
This elasticity certainly varies between one product and another product, because a product can be more important or needed by consumers than other products. The demand for products that are considered as necessities tends to be less sensitive to price changes because consumers will still buy these items even though the price increases.
These products are considered as inelastic. For example goods for daily needs such as vehicle fuel/gasoline.
On the other side, the price increase on a product (goods or services) that is not a general/basic need will make consumers move away because the opportunity cost to buy the product will be too high.
Products like this are considered very elastic and are usually easy to find. For example, available in supermarkets.
Consumers may not always need it in everyday life, and the product is considered to have substitution or substitute.
For example, if the price of carbonated beverage brand X experiences a price increase, people will change course and prefer brand Y to fulfil their thirst.
To determine the elasticity of a product’s demand and supply, we can use the following simple formula.
Elasticity = (% quantity change:% price change)
If the elasticity number is more than or equal to 1, then the curve is considered an elastic curve. But if less than 1, the curve is considered as inelastic.
Elasticity of Demand
The law of demand states that if other factors remain stable, the higher the price of an item, the lower the demand for the item. Consumers will tend to stay away from these products, they will tend to divert consumption to goods that are considered more important. So that the demand curve is in the form of a downward slope.
With a demand curve like that, then if a product is downgraded to the market according to the number of requests but accompanied by a slight price increase, the demand curve will appear flat or increasingly horizontal. This means that the product is more elastic.
Elasticity of Supply
Like the law of demand, the law of supply shows the quantity to be sold at a certain price.
But unlike the demanding law, this supply curve is an upward slope. It means higher the price will more amount supply to the product. Producers will supply more goods at high prices because increasing the number of products when prices rise will increase their income.
But the supply elasticity is the same as the elasticity of demand. If the price change affects the number of bids, then this supply curve will appear flat and considered elastic. On the other hand, if price changes only have a small impact on the quantity of products offered, the curve will be steeper, which means it is not elastic.
Factors that affect the elasticity
Below are some reasons that affect the elasticity
There are replacement items
In general, the more substitute goods available on the market, the demand for these items will become more elastic. For example, if the price of a consumer’s favourite cup of coffee rises, there will be a tendency for consumers to switch to brands or a cup of other cheaper drinks.
But if the price increase comes from the price of powder/coffee beans that do rise. Hence could be no change coffee sales because consumers will find difficulties to find a substitute for caffeine.
If a product is needed in everyday life, consumers will still buy it even if the price goes up. For example, if someone needs to ride a motorbike to go to work every day, then even though the price of fuel rises, he will still buy it because fuel is a necessity that cannot be replaced.
We take the example of a heavy smoker who can spend a pack of cigarettes every day. Although the price of cigarettes they usually buy goes up, they will tend to keep buying it as daily consumption.
This shows that tobacco is an inelastic product because the price changes do not significantly affect the quantity of demand. However, if the smoker feels that he can no longer afford to spend $ 2 per day to buy a pack of cigarettes, then he might start reducing his cigarette consumption over time. So that the price elasticity of cigarettes for consumers becomes elastic in the long run.
Thus the description of elasticity is included in the general field of accounting. After learning about the elasticity, we can distinguish the elasticity of demand and elasticity of offers that can be used to analyze the price of goods. Hopefully, it will provide benefits to increase our insight.