Elasticity
is the manner in which prices effect supply and demand. If something is inelastic, its supply
and demand do not respond much to changes in price, and if something is elastic, its supply and
demand do. This is an extremely useful principle for businesses and the government to be aware
of and use for their benefit.
For businesses, if a product they are selling
is extremely inelastic, they can typically increase the price, either to improve margins or
because of rising costs of production, and still maintain a significant demand. However, if one
of their inputs is very elastic, and the price drops drastically, the supply may decrease as
people purchase it in larger quantities.
The government also uses this to
their advantage when setting taxes or fees on certain goods. If a product is inelastic, they can
levy larger taxes on it and still see high demand.
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