Shifts vs. Movement

  • Movements in supply - Movements along the supply curve occur when the price of the good changes and the quantity supplied changes.

    CHART
  • Movements in demand - Movements along the demand curve ...

    CHART
  • Shift in supply - Occurs when a good's quantity supplied changes even though the price remains the same.
    • A shift in the supply curve implies the original supply relationship has changed, meaning that the quantity supplied is affected by a factor other than price.
    • For instance, a shift in the supply curve for corn may occur as a result of drought.

      CHART
  • Shift in demand - Occurs when the demand for a good changes even though the price remains unchanged. A shift in the demand curve signals that the original demand relationship has changed and the quantity demanded is affected by a factor other than price. For instance, a shortage of corn as a result of drought may trigger an increase in demand for other vegetables as consumers seek substitutes.

    CHART

Elasticity
The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity.

  • Elasticity varies among products, as some products are more essential to consumers than others.
  • Products that are necessities are less sensitive to price changes because consumers will continue to buy them despite price increases.
  • A good or service that is considered less of a necessity is more elastic, as a price change leads to sharp changes in the quantity demanded or supplied.

Formula
Elasticity = % change in quantity / % change in price


An elasticity greater than or equal to one (1) is considered to be elastic. An elasticity of less than one (1) is considered inelastic.
  • Factors affecting demand elasticity
    • The availability of substitutes
    • The amount of income available to spend on the good - Demand will be sensitive to a change in price if there is no change in income.
    • Time - Over a short period of time, a price change may not affect demand, but a price change that stays in effect over a long period may have a great impact on demand.


Fiscal and Monetary Policy

Related Articles
  1. Insights

    What's Demand Elasticity?

    Demand elasticity is the measure of how demand changes as other factors change. Demand elasticity is often referred to as price elasticity of demand because price is most often the factor used ...
  2. Insights

    How Demand Changes With a Variation in Price

    What is demand elasticity?
  3. Insights

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  4. Insights

    What Is Elasticity?

    Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. Learn the basics about it here.
  5. Investing

    Price Elasticity Of Demand

    Price elasticity of demand describes how changes in the cost of a product or service affect a company's revenue.
  6. Investing

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  7. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  8. Investing

    Product Demand Elasticity

    Demand elasticity is the ultimate measure of how consumer shopping patterns will change with economic conditions.
  9. Insights

    What Does Inferior Good Mean?

    The term “inferior good” does not describe a lack of quality, but rather, is an economic term used when discussing elasticity of demand for a good.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center