Concept: Elasticity of Demand

Elasticity refers to how sensitive demand is to price changes:  

• Elastic demand: Demand is very responsive to price changes. If the price drops, people buy significantly more; if the price rises, they buy significantly less. Examples: luxury goods, vacations, concert tickets, video games.

• Inelastic demand: Demand does not change much with price fluctuations. Even if prices rise, people still need the product. Examples: gasoline, medicine, electricity, water, toilet paper.

Graphs:

Government Intervention in Markets:

Governments sometimes intervene in markets to protect consumers from extreme price exploitation, particularly when dealing with inelastic goods.  

• Price ceilings (e.g., rent control, limits on drug prices): Prevent prices from rising above a certain level. This can create shortages because suppliers are less willing to provide the good at a low price.  

• Price floors (e.g., minimum wage): Prevent prices from falling below a certain level. This can create surpluses (e.g., more workers seeking jobs than available jobs at higher wages).

• Both of these tools prevent equilibrium price! (where how much suppliers are willing to invest meets how much people are willing to pay)

• Preventing equilibrium is not necessarily a bad thing, but it does come with economic consequences along with the benefits.

Key Takeaways:

• Elastic goods = people are price-sensitive, and demand is flexible.  

• Inelastic goods = people will buy regardless of price changes.  

• Government price controls (ceilings and floors) can fix one problem but create another, such as shortages or surpluses.