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Supply and Demand Elasticity

See Also:
Economic Indicators
Balance of Payments
Stagflation
The Feds Beige Book
What are the Twin Deficits?

Supply and Demand Elasticity

Supply and demand elasticity is a concept in economics that describes the relationship between increases and decreases in price and increases and decreases in supply and/or demand. We have described it in greater detail below.

Price Elasticity of Demand Definition

In economics, demand refers to customers’ need or desire for a given product or type of product and their eagerness to purchase that product. The more customers want a certain product, the more demand there is for that product. Less desirable or necessary products have lower demand in the marketplace.

What is elasticity of demand? Price elasticity of demand refers to the degree to which demand is influenced by changes in price. Basically, price elasticity of demand describes consumers’ sensitivity to changes in price. For example, if the price of a product suddenly goes up, broadly speaking, fewer people will buy it because it is more expensive. Perhaps people can no longer afford the product, or perhaps they feel the product costs more than it is worth. Regardless, to some extent, at least academically speaking, when prices rise, demand falls.

If a slight price increase causes a large decline in demand, price elasticity is high. Similarly, if a slight price decrease causes large increase in demand, elasticity of price is high. On the other hand, if a large price increase is required to cause any decline in demand, price elasticity is low. And if large price decreases are needed to cause any increase in demand, elasticity of price is low.

In sum, if a small price change causes a dramatic change in demand, price elasticity is high – consumers are highly sensitive to price changes. If small price changes cause little or no effect on demand, and substantial price changes are needed in order to see any effect on demand, then price elasticity is low – customers are less price sensitive.

Elasticity of Supply

In economics, supply refers to the availability of a particular product in the marketplace. If a particular product or type of product is widely available in the marketplace, that product is amply supplied. If there is a dearth of a particular product or product type in the marketplace, that product is in short supply.

Supply is also related to price. When the price of a product rises, supply will increase. This is because the makers of the product want to maximize profits by selling as much of the product as they can while prices are high. This will flood the marketplace with that product, leading to an eventual overabundance of the product. When products are too abundant – when there is too much supply available – prices fall. If everyone in town has the same red hat, you won’t be able to charge very much for yours.

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supply and demand elasticity

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supply and demand elasticity

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What is Deflation?

What is Deflation?

What is deflation? Deflation is the decline in the price for goods and services. It can also be referred to as the increase in the value of real money. In other words, it’s the value that the current currency will go up per unit of goods or services.

Deflation Explained

Deflation often occurs when the demand for goods or services drops. As this happens, the price of the current supply will often drop in order to meet demand. Deflation economics often happen during large recessions or depression times. Furthermore, deflation should also not be confused with the term disinflation which refers to a slowing effect of inflation or a slow increase in the price of goods and services.

Deflation Examples

Some common examples of when deflation has occurred are times like the Panic of 1837, the Civil War, as well as the Great Depression.

The Panic of 1837 was the first major time that deflation occurred as people rushed to banks there was an overall drop in the money supply as well a major decrease in the price of goods and services.

During the Civil War, there was another era of deflation as the United States set the dollar on a gold standard and reduced the amount of money printed during the war. This caused an overall drop in the money supply and therefore an overall drop in the prices.

Finally, the Great Depression was a time in which many banks failed and the ability to gain money became difficult thus causing deflation to occur and the price of goods to fall dramatically. This period of deflation is probably the most dramatic because of the time in which it took to climb back to normal levels of inflation.

what is deflation?

See Also:
What is Inflation?
Treasury Inflation Protected Securities (TIPS)
Consumer Price Index (CPI)
Supply and Demand Elasticity
Economic Indicators

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