Price Sensitivity

and finance Allah shmoop What are elasticity Sze of supply

and demand All right people when we're talking elasticity and

economics were talking about how responsive one thing is to

something else Like what if your brother snapped your arm

with rubber band Yeah if you reacted wildly While you're

very responsive to the change which means your elastic to

being rubber band snapped if you remain stoic as a

monk unmoving and un reactive you're in the elastic to

being rubber band snapped with the elasticity of supply and

demand were measuring the change in quantity as a response

to a change in price Will the price elasticity of

demand asks if price changes by n percent How does

the quantity demanded change in the technical sense Price elasticity

of demand is the percent change in quantity demanded divided

by the percent change in price OK well even in

the Monkey Kingdom we can measure the elasticity of demand

For instance there was a time when a monkey could

buy one banana for three back scratches a high price

But now a monkey can get one banana for the

price of one back scratch much much cheaper than before

in fact well it's a third the price since the

price of bananas changed well How did the quantity of

bananas demanded in the Monkey Kingdom change well since bananas

or cheaper now than they were before And since monkeys

loves me some bananas will The demand for bananas has

increased which means the demand for bananas moves down that

the band curve to a higher quantity and a lower

price like write down here But how many more bananas

were demanded Exactly The world wants to know if the

quantity of bananas demanded didn't increase that much Even with

such a drastic price reduction well then the monkeys would

have any elastic demand for bananas on the graph That's

when the price change looks a lot bigger than the

quantity change like when price elasticity of demand is less

than one while the good is considered to have any

elastic demand If instead the monkeys went bananas for bananas

demanding many many many more bananas in response to the

price drop well then it would be considered a relatively

elastic demand when price elasticity of demand is greater than

one Well then the goods considered to have elastic demand

well if we think back to the elasticity of demand

equation this makes sense like how much quantity changed is

on top and how much price changed is on the

bottom right there When quantity changes more than price our

equation is top heavy which means it'LL be larger than

one when quantity changes less than price Well it goes

the other way right Okay when consumers will buy a

lot more of something if the price drops or a

lot less of something when the price rises that good

has elastic demand It's stretchy when consumers keep buying a

similar amount of the good Even if the price changes

that good is in the elastic Let's take a look

at elasticity of supply from the banana supply Your perspective

The price elasticity of supply asks if price changes by

X percent How does the quantity supplied change Well the

price elasticity of supplies The percent change in quantity supply

divided by the percent change in price the higher the

price that banana suppliers can sell their bananas for well

the more bananas they'LL want to sell right The lower

the price the bananas with less They'LL want to sell

if we take our same case where banana prices decreased

by two thirds were only a third of the original

price Well how does that affect quantity of banana supplied

First of all why would the price of bananas decreased

Well if producers are priced takers it means their price

depends on consumer demand for the good In this case

a drop in the demand for bananas by consumers would

lead to a drop in prices So how does it

drop in consumer demand Change the quantity supplied Well if

the banana producer were elastic it means there's a large

drop in banana supplied compared to the price drop Remember

the more elastic something is the more drastic the response

as with elasticity of demand a goods supplies considered elastic

if the elasticity is bigger than one Well if banana

producers were relatively in elastic to a drop in price

than the quantity shrunk a small amount compared to the

price drop in elastic supply means the price elasticity of

the good is less than one Just as with any

elastic command Okay so you might be wondering why some

goods are more elastic imply Some are less elastic The

price elasticity of demand can change when prices change when

income changes and when substitute goods are available right The

effect of crisis and income changes are similar since they

both change your buying power in the market Right Substitute

goods are well a bit different say the price of

bananas dropped by two thirds because the substitute good became

available on the market Yes plantains were looking atyou Plantains

are no bananas but they're similar enough to be cutting

into the banana market when substitute goods cut into another

goods market well that goods demand usually drops causing a

price drop So for consumers it's a change in how

much cash is in your pocket and your alternative options

on the market So what about four suppliers Well the

price elasticity of supplies largely dependent on their production constraints

In other words how much control do suppliers have in

raising supply Because well sometimes they don't too much For

instance if there was a hurricane that wiped out a

slice of the usual supply of bananas banana supply will

be lower There's nothing suppliers can really do about it

when supply can't be increased in response to an increase

in demand Well the supply elasticity is in elastic Another

good example of an elastic supply is parking there just

some days when there's high demand for parking Yes supply

does not rise to meet that demand You can't just

get out your asphalt paving truck and throw down and

new spots or a thousand new spots to accommodate that

line of Tesla's forming at the garage entrance there Both

of these cases are examples of limited production capacity Other

factors that can affect the price elasticity of supply Well

firm stockpiling whether it's easy for firms to switch up

their production process and how long it takes firms to

produce new goods There wouldn't be a banana shortage if

we could get bananas to grow like bamboo But way

can't like Monkeys were sensitive to change price change That

is whether you're a consumer or a producer You have

immeasurable elasticity Deep down inside of you telling you how

to respond to price changes All you have to do

is put your banana down in Just listen for a

second really