The Market Mechanism

Before we conclude our study of the market mechanism, there is one final term with which you should be familiar. The word “elasticity” can be used when you are writing about either supply or demand.

The Elasticity of Demand

A demand curve is said to be elastic when a small change in the price results in a large change in the quantity demanded. When this happens, the demand curve will be relatively flat, like the one on the left. On the other hand an inelastic demand curve exists when a large change in price only has a small impact on the quantity demanded. In this instance the demand curve will look more like the one on the right.

A product will have an elastic demand curve when there are lots of available substitutes, or if the product is considered non-essential. For example, if you can’t gain access to the internet through one provider, then you can easily switch to another. On the other hand, products with no substitutes, or those which are considered “needs” are more likely to have an inelastic demand curve. For example, the demand for medication such as insulin is inelastic, as there is no substitute. Petrol is another product which has a relatively inelastic demand curve.

The Elasticity of Supply

A supply curve is said to be elastic when a small change in the price results in a large change in the quantity supplied. In this instance, the supply curve will look like the one on the left below – it will be relatively flat. As you have probably guessed by now, the last remaining graph on the page is an inelastic supply curve. In this case, a large change in price only has a small impact on the quantity supplied.

The elasticity of supply is affected by our ability to store the products which are created. If we can store the products for an extended period, then we can respond quickly when prices change. This tends to give these products a more elastic supply curve. For example, clothing items will generally have a relatively elastic supply curve, while service items (such as mechanical repairs to your car) can’t be stored at all, and so the supply curve is more likely to be inelastic.

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