Key Terms
Example
Gasoline in general is inelastic — you need it to drive. But gasoline from one specific station is highly elastic — you
Result
810,000 subscribers canceled immediately. Stock fell from ~$300 to ~$54.
Formula
Price Elasticity of Supply = (% change in quantity supplied) / (% change in price)
WORKED EXAMPLE
Apartment rents rise from $650 to $700/month. Supply increases from 10,000 to 13,000 units.
WHY IT WORKS
If demand is elastic, buyers are sensitive. Raise the price and you lose so many buyers that total revenue falls.
Inelastic demand
Quantity is stubborn. Raise prices to raise revenue.
Elastic demand
Quantity is sensitive to price. Lower prices to raise revenue.
Demand side
In the short run, consumers can't easily change behavior. In the long run, they buy different products, move, or change
Supply side
In the short run, producers can't easily expand. In the long run, they build capacity, hire, and invest.
Consequence
In the short run, supply/demand shocks show up mostly as price changes. In the long run, they show up more as quantity a
Cigarettes
Inelastic demand. Tax goes up; price rises; consumers keep buying.
Beachfront hotels
Inelastic supply (can't move the hotel). Tax introduced; sellers can't escape; burden falls on sellers.
What went wrong
They underestimated the number of close substitutes that had developed (streaming competitors, rental kiosks). Actual su