Elasticity...what does it mean? How does it work? Is it something that can be seen or used in the real world? How can it help or hurt a business? Well I am here to answer those questions and when I am done YOU will be an expert on elasticity.

Lets start with the meaning of elasticity. For those who already know, no I am not talking about the "flexibility" of something per say, but economic elasticity. In economics, elasticity is the degree to which a demand or supply is sensitive to changed in price or income. Elasticity in supply and elasticity in demand is better explained separate.

Demand is elastic when an increase in price significantly reduces the quantity demanded. It is a measure of how responsive the quantity demanded is to price change. For example, the price of new headphones is usually $50, and the quantity stands at 100. But, when the price goes up to $60 the quantity has a notable difference, going down to 50. This is because the demand of the headphones are elastic.

$18.99 vs $9.99

In demand, there are many factors that can change elasticity like availability of substitutes. the time horizon, the category of the product, if it is a necessity or a luxury, or the size. Everything makes a difference, especially substitutes. When you have a substitute for a good or service, it is more likely people will switch to a more affordable product when there is an increase in the price. For example, when one store is selling vitamins at one price, and increases the price, the customer is more likely to go elsewhere to find the product at a better price especially when it is something like vitamins which can be easier to find because it has a narrow classification.

Time horizon can change the elasticity of a product when over time customers can find a substitute for that good or service. As far as the nature of the good, whether it is a necessity or a luxury, it has more or less elasticity. When the goods or service is a necessity the customer is more likely to still purchase it. Luxuries are different. When the price of the luxury increases a customer is more likely to change their behavior and maybe find a substitute of something else. For example, a customer is more likely to purchase food when the price is raised, rather than a spending money on a more expensive concert ticket.

Like the elasticity of demand, the elasticity of supply is a measure of response. The difference is, it is a measure of the response the quantity supplied is to the to a change in price. Supply is elastic when an increase in price increases the quantity supplies as you can see in the graph. A supplies elasticity can be changed by the change in unit costs per production, the time horizon, the share of market for inputs and the geographic scope.

If production increases with constant costs, then the supply is elastic. For example, if a signed Kobe jersey was being sold for a price much higher than usual, customers would still buy it, and it would appreciate overtime and that brings on the time horizon.