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Iunit elastic4/1/2023 ![]() This determines whether the supply or demand for a product is elastic, inelastic, or unit elastic (a.k.a. Say, if the price of a product increases by 15%, by how much will its demand change? We call this Price Elasticity of Demand or Price Elasticity of Supply. You see, in economics, there is this thing they call elasticity which measures the responsiveness of one variable to the changes in another variable. Now let’s go back to how a product’s price affects the rise and fall in its supply demand. The optimal price of a product results in the supplier earning maximum profits and consumers getting the quantity that they want. However, if the price is too low, there would be more demand than supply leading to a shortage.īoth situations mean a loss of potential profits for the supplier. If the price is too high, there would be more supply than demand leading to a surplus. If we combine these two economic principles, we can infer that the optimal price of a product is determined by the relationship between its supply and demand. It shows us that the demand for a product has an indirect relationship with its price. If the price decrease, then its demand should increase. On the other hand, the law of demand states that if the price of a product increases, its demand will decrease. If the price decrease, it also follows that supply will also decrease.Īs we can see, the supply of a product has a direct relationship with its price. The law of supply states that if the price of a product increases, its supply also increases. The law of supply and demand is actually a combination of two economic principles: the law of supply, and the law of demand.
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