Changes in Supply and Demand

In the previous tutorial we defined the concepts of supply and demand, and saw how they correlate.

But what causes supply and demand to change?

Well to answer that, we must learn about elasticity.

Elasticity is the measurement of the percentage change of one economic variable in response

to a change in another.

In other words, it involves looking at how much one thing has changed based on an incremental

change for some other thing.

Let’s now look at two types of elasticity.

Rather predictably, these are elasticity of supply, and elasticity of demand.

Elasticity of supply measures how producers will respond to changes in the price of a

good or service.

The key factor influencing elasticity of supply is time.

In the short run, some producers can’t easily change their output levels, and therefore

their supply is inelastic, whereas in the long run, adjustments can be made to make

supply more elastic.

An easy example to demonstrate this is farmers.

Say a farmer’s crops fail due to a drought.

Well, that farmer is going to make dramatic adjustments, or they might end up losing a

lot of money, but those adjustments won’t pay off until long after the drought is over.

In the long run, the farmer might be able to take measures to prevent the loss of crops

in the case of future droughts, or perhaps the farmer might adjust the types of crops

that are planted.

Regardless, in this case, in the short run supply is inelastic, and in the long run supply

is more elastic.

Elasticity of demand measures how consumers will want more or less of something when the

price rises or falls.

If people buy the same amount or just a little less of a good or service after a large price

increase, the demand is inelastic, meaning it doesn’t change much.

If people buy much less of a good or service after a small price increase, the demand is

elastic, meaning it can change a lot.

For example, if movie tickets went up from $12 to $15, but you don’t care because you

really want to see the latest blockbuster movie on the big screen, then your demand

is inelastic.

However, if movie tickets went up from $12 to $12.50, and that small increase caused

you to avoid going to the movies, then your demand is elastic.

So clearly, the big question is: What influences elasticity?

For consumers, it comes down to preference for the good in question.

For producers, it comes down to what it costs to produce something.

This is also known as input costs.