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 prince 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 elasticity varies between zero and one, the supply is called inelastic. With coefficients greater than 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 elasticity of agricultural commodities (potatoes, wheat, fruits, eggs and milk) vary greatly. Because of increasing specialization of production, of farm animal products, in particular, elasticity for such commodities as pigs or broilers have decreased in recent years.