Economics Notes: Supply, Demand, and Elasticity

Impact of Supply Changes and Demand Elasticity

• When supply decreases, the price of a good increases, and the quantity traded decreases.

• The magnitude of these effects (how much price goes up or quantity goes down) is significantly influenced by the elasticity of demand.

  • If demand is much less elastic (meaning consumers are not very responsive to price changes), a decrease in supply will result in a larger price increase compared to a situation with more elastic demand.

• Example: Drug Costs: High drug costs are often attributed to the inelastic demand for essential medicines, meaning people will pay high prices because they need them. The idea that