Elasticity of supply works similarly. If a change in price results in a big
change in the amount supplied, the supply curve appears flatter and is
considered elastic. Elasticity in this case would be greater than or equal to
one.
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On the other hand, if a big change in price only results in a minor change in
the quantity supplied, the supply curve is steeper and its elasticity would be
less than one.
A. Factors Affecting Demand Elasticity There are three main factors that influence a demand's price
elasticity:
1. The availability of substitutes - This is probably the
most important factor influencing the elasticity of a good or service.
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In
general, the more substitutes, the more elastic the demand will be. For
example, if the price of a cup of coffee went up by $0.25, consumers could
replace their morning caffeine with a cup of tea. This means that coffee is
an elastic good because a raise in price will cause a large decrease in
demand as consumers start buying more tea instead of coffee.
However, if the price of caffeine were to go up as a whole, we would
probably see little change in the consumption of coffee or tea because there
are few substitutes for caffeine. Most people are not willing to give up
their morning cup of caffeine no matter what the price. We would say,
therefore, that caffeine is an inelastic product because of its lack of
substitutes. Thus, while a product within an industry is elastic due to the
availability of substitutes, the industry itself tends to be inelastic.
Usually, unique goods such as diamonds are inelastic because they have few
if any substitutes.
2. Amount of income available to spend on the good - This
factor affecting demand elasticity refers to the total a person can spend on
a particular good or service. Thus, if the price of a can of Coke goes up
from $0.50 to $1 and income stays the same, the income that is available to
spend on coke, which is $2, is now enough for only two rather than four cans
of Coke. In other words, the consumer is forced to reduce his or her demand
of Coke. Thus if there is an increase in price and no change in the amount
of income available to spend on the good, there will be an elastic reaction
in demand; demand will be sensitive to a change in price if there is no
change in income.
3. Time - The third influential factor is time. If the
price of cigarettes goes up $2 per pack, a smoker with very few available
substitutes will most likely continue buying his or her daily cigarettes.
This means that tobacco is inelastic because the change in price will not
have a significant influence on the quantity demanded. However, if that
smoker finds that he or she cannot afford to spend the extra $2 per day and
begins to kick the habit over a period of time, the price elasticity of
cigarettes for that consumer becomes elastic in the long run.