What is Elasticity of Demand and Supply?

The elasticity of demand and supply are two important concepts of microeconomics. The elasticity of demand measures the responsiveness of consumers’ demands to the price change, changes in income of consumers, and changes in the price of the related goods. Similarly, the elasticity of supply refers to the proportionate change in the quantity supplied due to the proportionate change in the price. In other words, it can be said that elasticity of supply measures how the quantity of supply changes when the price changes of that particular product. 

Before going to further discussion, one needs to know about demand and supply.

What are Demand and Supply?

The demand of an economy and supply of an economy are two of the most important economic terms which form the basis of microeconomics and are co-related or intertwined with each other. Generally, demand means the quantity of product or commodity, or services that a customer or consumer wants to buy and at the same time is having the purchasing power to buy that product at a particular point of time. On the other hand, the supply of an economy often refers to the overall quantity of goods and services which can be produced and can be made available for the consumers for consumption. 

Law of Demand

One of the most important laws that are followed in microeconomics is that there is a negative relationship or inverse relationship between the price of a commodity and the amount of demanded, keeping other factors constant. The law of demand represents the interaction between buyer and seller of a specific product in an economy. It means that when the price of a commodity increases for some reason or the other, the quantity demanded of that particular good is supposed to go down. Demand and supply in an economy give the idea of what kind of price level of any product or service will prevail. Therefore, it can be said that the higher the price of a commodity, the lesser will be the quantity demanded of it and vice versa. 

Demand Curve

To show what kind of demand is prevailing in the economy, all diagrammatical representation is done of the market demand or even individual demand. Therefore, the demand curve is the diagrammatical representation of what kind of relationship is there between the price of the good and according to which what amount of that good is being demanded within a particular time. When any of the factors affecting the demand of a commodity change other than its price, it is said that there is a shift in the demand curve. 

Law of Supply

The law of supply describes that the seller will be willing or wanting to produce more if the price of any goods or services is high to earn more profit, keeping other factors constant. 

This can be understood with the help of an example. If the price of juice increases, the juice seller will be wanting to produce and sell more juice to gain revenue or profit. 

Supply Curve

Just like the demand curve, the market supply or individual supply is represented with the help of a supply curve that shows the relationship between the price and the quantity supplied. The supply curve is usually a positively sloped curve which means and states that the supply of a commodity or good is positively related to the price which means they move in the same direction. In other words, it can be said that if the price increases of a commodity there will be an increase in the quantity supplied of the commodity by the producer.

While evaluating the type of demand curve and supply curve, the elasticity of demand and supply becomes one of the most important factors that determine them. 

Elasticity of Demand

The demand for a product is said to be elastic if changes in a price increase or decrease its demand. There are following kinds of demand elasticity: 

Income elasticity of demand: The income elasticity of demand says that how quantity demanded changes of a particular good or service with regards to changes in the income of a consumer. Therefore, in this case, it can be said that income plays one of the most important roles in determining the demand. Income elasticity for a normal good is positive and for an inferior good is negative. For luxury goods, demand is highly income elastic while for necessary good demand is less income elastic.

Cross elasticity of demand: Cross elasticity of demand generally takes place in terms of complementary good and substitute good. This is a concept in which the effect of changing substitute good or complementary good is studied on the main good that has been taken into consideration. For example, cross elasticity of demand studies how changes in the price of tea can affect the demand for coffee. This is what is known as cross elasticity of demand. For substitutes, cross elasticity of demand is positive and for complementary it is negative.

Price elasticity of demand: This is one of the most important concepts that come under the elasticity of demand. This is the measure which shows that how the amount of product demanded changes due to change in the price of the commodity itself keeping other factors constant. If the value of the price elasticity of demand is less than one, then demand is said to be inelastic, if it is greater than one, then demand is elastic and if it is equal to one, then demand is unitary elastic.

Whenever it comes to the elasticity of demand, the changes are represented by percentage changes. Therefore, whenever the elasticity of demand is looked upon, the percentage changes are taken into consideration rather than the absolute values. The elasticity of demand captures even a small change of price or price changes on quantity demanded and vice versa based on what criteria is been looked upon.

Elasticity of Supply

On the basis of the value of the elasticity of supply, supply can be either inelastic, elastic, or unitary elastic.

Inelastic supply: As the name says, in this kind of supply situation the supply curve is generally not very elastic but rather inelastic. This means that there is no change in the amount of product or commodity that has been supplied even if there are price changes. In this case, the value of elasticity of supply is less than one.

Elastic supply: For elastic supply, the value of elasticity of supply is greater than one. The elastic supply shows that even if there is a very small change in the price, the amount of the commodity supplied will be changed in a greater amount.

Unitary elastic supply: This means that the amount of commodity supplied is just equal to the amount of price changes. Therefore, the equation comes to one because the ratio of changes in both supply and price is in the same proportion. Here, the value of the elasticity is equal to one.

Context and Applications

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for

• B.A in economics
• M.A in economics
• B.com
• BBA
• MBA