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Surname: Desmond K Sangbong

Economics – Case Study – AutoEdge Auto Company

Professor: Gerald Weisenseel

Date: May 24, 2015

Elastic and Inelastic changes in demand and supply

Economists assert that when the price of a product falls, the quantity demanded increases and quantity supplied decreases. In many cases, directions of such changes matter most. In other scenarios, the magnitude of such changes matter as well. A change in price therefore has an impact on product and consumer behavior. The term elasticity is used to measure such changes. Price elasticity of demand is calculated as percentage change in the quantity demanded divided by percentage change in the price, as the price elasticity of supply is calculated as a percentage change in the quantity supplied divided by percentage change in price. Price elasticity of demand simply depicts the proportionate change in demand in a given change in price.

Motor vehicles are now being considered as a way of life for people and have consequently had an economic impact through becoming a primary means of transportation for people to commute to and from work, travel between destinations or vacations. Family budget now encompass allocation for transportation costs. Price elasticity of supply in auto industry depends on the number of particular types of vehicles available.

The automotive industry is regarded as being elastic as prices fluctuate with regards to supply and demand. Consumers are now able to choose from a vast amount of vehicles make with many models being in the market. This means that although vehicles are considered as necessity, some cars are considered as luxury. Another factor that has a direct impact on supply and demand of vehicles is the inflating costs of fuel as this makes less people purchase automobiles. This consequently affects manufacturing on the number of vehicles to be produced, and subsequently, the numbers of vehicle parts. This means that the price of vehicles as well as vehicle parts increases as the demand is low thereby making price elasticity of demand be elastic.

Elasticity is used to measure how sensitive the consumers are with regard to changes in price. In scenarios where prices matter little, the changes in price will often have small effects on the willingness of consumers to buy or sell. As the changes in quantities supplied and demanded will be small, calculation of elasticity will consequently be small resulting to inelastic outcome. On the other hand, if consumers are sensitive to prices, small price changes will result to large changes in consumers’ willingness to buy or sell. Large changes in quantities usually result to large elasticity’s. Elastic simply depicts something that stretches easily. For instance, if consumers willingness to buy a particular auto part stretches quite a lot when there is a change in price, its demand is considered as being very elastic. If consumers willingness to buy a product doesn’t stretch or change much when the price changes, then the demand is considered as being inelastic.

If AutoEdge does raise price, how will its total revenue shift? Total revenue is price multiplied by the quantity produced. If AutoEdge raises its price by 10 %, then its total revenue will depend on whether the demand turns out to be inelastic or elastic. Id demand turns out to be elastic, then AutoEdge will find its total revenue dropping. The 10 % rise in price will be most likely offset by the significant drop in quantity. If the demand is inelastic and the company can manage to maintain majority of its customers at a higher price, then its total revenue will increase. The effect of higher prices will most likely offset the small decrease in volume.

The relationship can therefore be summarized as: if the demand is elastic, then the percentage change in quantity will consequently exceed the percentage change in prices and total revenue will shift in similar direction as quantity. If the demand is inelastic, then the percentage change in quantity will be small than the percentage change in prices and total revenue will shift in similar direction as the price.