Shifts vs. Movement
- Movements in supply - Movements along the supply curve occur when the price of the good changes and the quantity supplied changes.
- Movements in demand - Movements along the demand curve ...
- 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.
- 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.
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.
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
InsightsDemand 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 ...
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InvestingDemand elasticity is the ultimate measure of how consumer shopping patterns will change with economic conditions.
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