elasticity in demand and supply

Tellis (1988) defines elasticity conditions as the proportionate change in demand for a product or service caused by a change in price or earnings. There are five types of elasticity conditions: perfectly elastic demand, perfectly inelastic demand, uniformly elastic demand, somewhat inelastic demand, and moderately elastic demand.

The elasticity criteria that can explain this are perfectly elastic demand and unitary elastic demand. When wages rise, the supply of labor will exceed the demand for work. This will push the wages above the equilibrium price. To restore the state of equilibrium the supply will be reduced to match the demand and the response is explained as being perfectly elastic. If the increase in wages is proportionate to the decrease in employment, then the condition is called a unitary elastic demand.

According to Kilian (2009), the demand for a commodity is the quantity that the consumer is willing and able to buy at a particular price. The supply of a commodity, on the other hand, is the quantity of a product that the seller is willing and able to supply at a certain price. The law of demand and supply reveals that demand has an indirect relationship with price while supply has a direct proportionality with the price.

The rise of technology in the gasoline market reduces the cost of production resulting in a proportional increase in the quantity supplied. When automobiles become more fuel efficient, the demand for gasoline reduces proportionately. This results in an excess supply of gasoline. The supply curve shifts or moves to the right due to the increase and the demand curve shifts or moves to the left due to the decrease leading to a lower equilibrium price (Kilian, 2009).

References

Kilian, L. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99(3): 1053-69. DOI: 10.1257/aer.99.3.1053

Tellis, G. J. (1988). The price elasticity of selective demand: A meta-analysis of econometric models of sales. Journal of Marketing Research, 331-341.