Elasticity

Elasticity refers to the amount of change in demand or supply as of relation to price changes in the good. Goods are known as elastic goods or inelastic goods. An elastic good would show a marked decrease in quantity demanded should there be an increase in price while While an inelastic good will not have it’s quantity demanded decrease significantly as of relation to the increase in price

An example of an inelastic good would be petrol. Regardless of how much you increase the price of petrol (reasonably) , the demand of oil by people will generally be the same and people would still buy it.( Because petrol is used by a large percentage of people even in singapore, our parents who drive cars cannot find substitutes for petrols!. thus the demand of oil is known as inelastic).

Let us make an example of a elastic good using milo. The more the price of milo goes up the less likely people will choose to buy it because with the same amount of money that they must use to buy milo(now increased in price) people would now choose to buy substitutes (e.g they could buy coco, or horlicks). Resulting in a fall for the demand for milo. Thus, milo can be known as an elastic good because it less of a necessity and people will stop buying it when the price goes too high because the opportunity cost for buying the good becomes too high that it deters consumers.

There are many factors that affect the elasticity of a good. Number and price of close substitutes within the market is one of the factors i want to go through - The more similar (or closely related) substitutes of a good is present in the market the more elastic the good will be. The demand will decrease in relation to a change in price because people will decide that the opportunity cost for buying the good becomes too high and they would rather buy some other good as a subsitute.( that is why oil is an inelastic good because there aren’t really substitutes for oil!).

Percentage of income spent on a good is another factor that affects elasticity of a good - It is reasonable to say that the smaller the percentage of your income being spent on a particular good the more inelastic demand will be.This is very logical and can be sought through common sense. For example your parents gave u $100 to do some shopping. You suddenly remember that you just lost your eraser in school. You walk into a bookstore and just as u picked up an eraser, you realise that the price of the eraser has gone up from 50cents to 1 dollar(50% increase!) would that deter you from buying that eraser? In most (consumer)cases, no. Because in relation to the 100 dollars you have, 1 dollar is just an insignificant amount. Thus comes the logic of Percentage of income spent on a good (e.g erasers, rulers)

Thus,the concept of elasticity is important because Elasticity is closely related to the concept of demand and supply. Elasticity helps economists understand suppliers ability to increase stocks and the consumers ability to purchase. It affects the amount of tax placed on different products by our government for them to maximise country profits and at the same time make life affordable.Thus the concept of elasticity, like demand and supply, is always around and of close relation to us!

Darren Low 5w