Boingggg boinggg. Flexing your mind like it’s elastic. Ready?
Elasticity describes the price sensitivity of buyers to changes in prices. This can apply both to firms, who need supplies (raw materials) and labor (workers) and consumers (like you, Tim).
A high elasticity toward a certain good means consumers are flexible with it. Price on your fave cereal went sky-high? Eh, that’s okay...you’ll just get the off-brand version. Low elasticity, which bottoms out at completely “inelastic,” means people aren’t flexible to price changes. They’ll still buy the thing, whatever the price is. Prices of oil rise, and you need gas to drive to work? Welp. Gotta suck it up and pay for it.
Now for the short and long of it. In the short-run, demand for goods is more likely to be inelastic. Take the gas example again for getting to work. In the short-run, you’ll suck it up and pay higher gas prices, because you drive a car to work. But if gas prices stay up, or maybe even continue to rise, you may eventually switch to public transportation.
Consumers have more time to change habits in the long-run, so elasticity is more, well...elastic...in the long-run. Prices of goods at the grocery store don’t rise and fall by exact pennies according to market supply and demand, like stocks do. Rather, they’re “sticky,” since they don’t change much in the short-run, but they do rise in the long-run.
Same with elasticity: consumers are “sticky” with their demand in the short-run, but in the long-run, they’ll make bigger changes in buying behavior response to price changes.
Related or Semi-related Video
Econ: What is elasticity?3 Views
And finance Allah Shmoop what is elasticity Socks underwear rubber
bands slingshots Olympic gymnasts What do these things have in
common while they can stretch In other words they're elastic
This concept comes up in economics It's called drum roll
Please elasticity Shocker bullet measures How much One economic variable
changes when a change is made to another economic variable
Well the most common situation has to do with demand
Like how much does demand change when there's a change
in price I eat price elasticity of demand That's how
you kind of phrase it Well think of it as
meaning or implying how far consumers will stretch their willingness
to buy as price increases like lifesaving prescription drugs Often
there's only one drug that Khun treat a specific disease
particularly rare ones out there Well don't take that drug
and you die People will pay you almost anything to
get it Items like that are said to have in
elastic demand Changes in price don't do much to dent
demand Just grab him out and it looks pretty steep
You know prices go up but demand only changes a
little tiny bit Think gasoline and cigarettes Yeah like that
You need him on the other side Of the spectrum
There are items that have highly elastic demand Little price
changes can dramatically alter whether someone is willing to buy
a product or not Graph him out on the line
looks very flat Let's take ketchup I always do It
goes great on hot dogs So we have some hotshot
new V P at Heinz ketchup and they decide the
brand name of Heinz is worth double any other crushed
tomatoes and a whole bunch of sugar Well anyway they
raise prices So heights now is six dollars for ah
big semi partial gallon of ketchup right there but the
generic Safeway brand or the generic other brand you've never
heard of There are only two dollars and fifty cents
and ketchups kind of ketchup Consumers aren't really that loyal
to it So when you raise prices who bad things
happen behind because well the loyalty that the new VP
of thought that there would be two hind sketch up
wasn't there and consumers were just fine at less than
half the price for the generic brand Yeah very elastic
demand There you raise prices a little bit and boom
volume declines All right so what affects elasticity Well the
first question asked Are there any substitutes you can buy
Prescription drugs might be highly elastic until the generic version
comes out You know kinda like the catch up thing
Right Then all of a sudden the name brand version
loses a lot of its pricing power Right Well another
key question What kind of commodity is it like Is
it a necessity or a luxury like waters A necessity
but lots of substitutes for the way you buy water
Right And how high is the price level To start
What Manufacturers can probably sneak a five percent price increase
you know on say a dollar package gun But that
same five percent price increase to a Mercedes Well that
would bump the price of it You know like several
thousand dollars right They start out at seventy grand You
raised five cents and thirty five hundred bucks Thank you
very much All right Well can you wait to buy
that car then Kenya Well if you're planning that Mercedes
purchased well you might be able to push it off
a year or two if you you know think the
price is too high Another few thousand miles on the
odometer won't affect trade in on your old crappy Volvo
car Too much so you drive However if you're broken
down by the side of the road in Death Valley
and the only tow truck driver within a hundred miles
says it will be one hundred fifty dollars to come
Get your car Well you either pay or you know
start walking How long you have The product also plays
into the price elasticity of demand Disposable products can be
pretty cheap and elastic in terms of price right Think
those disposable plastic razors in Scooby Doo Band aids and
you know packs of gum But if you can get
a long term used out of something while the price
could be higher think stuff like refrigerators or cop water
heaters and well yeah that Mercedes luxury Your income is
another factor in determining elasticity as well All right going
back to Mercedes here a five percent increase in the
car price might put it out of your range Well
what if we go with the used Ford Fiesta Yeah
well I'd save you a whole bunch of money It
was fun to drive But then if wealthier Jeff Bezos
richest man in the world for that five percent increase
wouldn't even register Pete by the Mercedes anyway the way
the rest of us by a hamburger for lunch And
then well he might use it as a flowerpot in
his backyard So a lot goes into price elasticity Unfortunately
economists have an equation for all this stuff to figure
out something's elasticity while we take the percentage change in
the quantity of something and divide it by the percentage
change in the price when different prices and demand levels
and curved shapes are involved here So if the result
gets you a number greater than or equal to one
in this little graph equation here then that product is
considered elastic meaning a change in price is highly sensitive
It has a notable effect on demand You raise it
a little bit in demand shrinks those easy to find
products where there are a lot of potential substitutes Yeah
they're usually highly elastic They compete on price Remember the
great ketchup dilemma Yeah that's got an elasticity greater than
one And then there's the other side of the coin
If you run the last two city equation and get
a result less than one Well then you've got an
elastic product Consumers don't change how much they purchase one
Prices rise Well think about gasoline We're not talking about
the price of anyone station You know if the place
by your house jacks up prices well you'll just drive
around the block and goto cheaper place right But if
gas in general skyrockets like say there's a revolution in
the Middle East or if hurricane takes out all the
oil rigs in the Gulf of Mexico Well then gas
prices all over the world spike But what do you
do You know that's you grumble You complain you post
mean Twitter comments about gas state Asian owner but ultimately
you drive on over and pump the gas Well you
don't have much of a choice here for normal people
in normal gas powered cars That's inelastic demand even when
there are big moves in price while you find a
way to pay it In other words well you're about
as flexible in that regard as that gymnast I do
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