Using elasticity concepts, explain why some items experience huge price changes (10)

Using elasticity concepts, explain why some items experience huge price changes (10)

 

Some items have huge price changes especially when there are changes in demand or supply conditions. This is usually when demand is price inelastic like  basic necessity. Demand is price inelastic because it is a necessity good, with little amount of substitutes and it forms a small proportion of income. Hence, due to supply changes, price fluctuations tend to be significant.

 

Price Elasticity Fluctuations

Price Elasticity Fluctuations

From the diagram, given inelastic demand, when the supply of agricultural goods drops from S1 to S (due to weather condition or supply shocks), the prices go up significantly from P2 to P1 as opposed to an elastic demand D, where prices only go up to P0 for the same drop in supply. The rationale being since the demand is price inelastic, people buy the goods regardless of price, hence suppliers will pass on price increments to consumers.

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By |2015-10-07T21:08:29+00:00October 7th, 2015|Economics resources, Micro: Demand & Supply|0 Comments

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