CFP

Economics and The Time Value of Money - Shifts Vs. Movement and Elasticity

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

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

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  • 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.

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  • 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.

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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.



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