Price Elasticity of Demand and Supply

There is a relationship between demand and price. How much demand for a commodity is affected by a change in price is called elasticity of demand. If a small change of price results in a large change in demand, the demand is called elastic, if the demand changes only a little, it is called inelastic. The price elasticity of demand coefficient is negative as demand usually falls with a rise in price.

The price elasticity of supply shows the percentage change in the quantity supplied resulting from a one-percent change in price.

As an increase in the quantity supplied is normally a result of a rise in price, the coefficient is usually positive. We have a “0” (zero) elasticity when a price change results in no quantity supplied change. This is called a perfectly inelastic supply. Provided the elasticities vary between zero and one, the supply is called elastic. The percentage change in quantity is larger than the corresponding percentage change in price.

Agricultural supply is mostly inelastic because of the high proportion of such inputs as land, buildings, and machinery. The elasticities of agricultural commodities (potatoes, wheat, fruits, eggs, milk) vary greatly. Because of increasing specialization of production of farm animal products, in particular, elasticities for such commodities as pigs or broilers have decreased in recent years.

Answer the questions:

1. Which demand is called elastic?

2. In what units is elasticity of supply shown?

3. Why is the price elasticity of demand coefficient negative and the corresponding coefficient for supply positive?

4. What supply is called inelastic?

5. What is the difference between the inelastic and the perfectly inelastic supply?

6. Why is agricultural supply usually inelastic?

7. What is the tendency of agricultural supply development?