key term - Relatively Elastic

Definition

Relatively elastic refers to a situation where the quantity demanded or supplied of a good or service is significantly responsive to changes in price. This concept plays an essential role in understanding how markets react to government interventions such as taxes, subsidies, or price controls, affecting consumer behavior and overall market efficiency.

5 Must Know Facts For Your Next Test

1. When demand is relatively elastic, a small decrease in price can lead to a significant increase in quantity demanded, and vice versa.
2. Government interventions like subsidies can make demand more elastic by lowering prices and increasing consumers' purchasing power.
3. Relatively elastic supply can result from factors such as readily available resources and low production costs, making it easier for producers to respond to price changes.
4. Price floors, when set above the equilibrium price, can lead to surpluses in markets with relatively elastic demand due to consumers reducing their quantity demanded.
5. In markets where goods are considered luxuries rather than necessities, demand is typically more elastic because consumers can easily forgo these items when prices rise.

Review Questions

• How does relatively elastic demand impact consumer behavior when the government introduces a new tax on a product?
  • When the government imposes a tax on a product with relatively elastic demand, consumers will likely reduce their quantity demanded significantly due to the increased price. Because they are sensitive to price changes, even a small increase from the tax can lead to substantial decreases in purchases. This behavior reflects the responsiveness of consumers, demonstrating that when taxes raise prices, some consumers may seek substitutes or stop buying the product altogether.
• Analyze how subsidies might affect the elasticity of supply in a market and what consequences this might have for pricing.
  • Subsidies can make supply relatively more elastic by lowering production costs for suppliers. When producers receive financial assistance, they can afford to increase production without raising prices significantly. This responsiveness may result in lower prices for consumers and increased availability of the good in the market. The enhanced elasticity allows producers to adjust more easily to changes in demand, which can lead to greater market efficiency and improved consumer access.
• Evaluate the relationship between relatively elastic demand and government price controls, discussing potential market outcomes.
  • Relatively elastic demand interacts significantly with government price controls, such as price ceilings. When a price ceiling is set below the equilibrium price in a market with elastic demand, it can lead to shortages since consumers will want to purchase much more at the lower price than what suppliers are willing to sell. This mismatch between demand and supply creates inefficiencies and may lead to black markets as consumers seek alternative ways to obtain the product. Additionally, producers may reduce their supply due to decreased profitability, compounding the issue of scarcity in the market.

Related terms

Elasticity of Demand: A measure of how much the quantity demanded of a good changes when there is a change in its price.

Price Ceiling:

A government-imposed limit on how high a price can be charged for a product, which can lead to shortages if set below the equilibrium price.

Subsidy:

A financial aid provided by the government to encourage the production or consumption of a good, often leading to an increase in supply and lower prices.