 Applications of supply and demand elasticity

Elasticity is a value that show how much the buyer is responsive towards the various
changed that can be produced on the market. Therefore, the price elasticity of demand
measures how the quantity demanded of a good respond to a change in price of that good.
There is a strong connection between the price elasticity of demand, the demand of a good
on the market and also the price that the seller decides regarding the good. The
repercussion of a change in price and demand will be seen on the total revenue that the
seller has. (Kenton W. 2018)
The case study proposes as an example the train tickets and the fluctuation in price and
demand between certain hours and how the total revenue is influenced by these changes.
While the demand for a train ticket is high between 6.00am and 9.00am, in the midday the
quantity demanded decreases. As a result, in the morning a train ticket for a trip from
Birmingham to London costs around £80, while at midday, just between £10 to £20. The
necessity of customers’ commuting made the price of quantity demanded inelastic, so not
so responsive to the change in price, in the morning. On the other hand, at midday, the
price of quantity demanded becomes elastic, using train being not such a necessity.
(Mankiw, G. N. and Taylor, M. P. 2014)
All these fluctuations in price and in quantity demanded have a direct impact towards the
total revenue of the train operator who decided whether the price of a train can be
increased or decreased. The total revenue of a company is defined as the amount paid by
buyers and received by sellers of a good. To have a total revenue higher, the train operator
decides to lower the price at midday, where the demand decreased, in order to have more
buyers. (Mankiw, G. N. and Taylor, M. P. 2014)
Another case study shows how the income elasticity of demand shifts though time and how
farmers and the productivity in agriculture changes. Even if along with the evolution of
technology helped the productivity regarding the agriculture, other externalities need to be
taken into consideration such as weather, pests or diseases. Giving these factors, statistics
bases on the case study shows that the average income of a farmer 20 years ago was
400,000 euros because each acre of land produced 2 tonnes of wheat. Based on THE
assumption that the productivity increase to 3 tonnes of wheat per acre, the average
income would be 200, 000 euros more. (Mankiw, G. N. and Taylor, M. P. 2014, Prateek A.
2019)

However, as the food in general is considered price inelastic, so the buyers does not
respond aggressively to a price change, the demand for wheat increased with a relatively
small amount. This shows also that food is income inelastic, which means that even
consumers started to earn more money, the demand in food remained relatively the same
even thought the quantity supplied by the agriculture department increased. As a result,
nowadays, farmers’ income has fallen to 300, 000 euros. (Mankiw, G. N. and Taylor, M. P.
2014, Prateek A. 2019)
Bibliography:
1. Kenton W. (2018) Investopedia. Price Elasticity of Demand [online], 22 October 2018.
Available from: <https://www.investopedia.com/terms/p/priceelasticity.asp> [accessed 03
November 2019]
2. Mankiw, G. N. and Taylor, M. P. (2014) Economics, 3th Edition: Thomson.
3. Pettinger T.(2017) Economics. Externalities – Definition [online], 28 June 2017.
Available from: <https://www.economicshelp.org/blog/glossary/externalities/> [accessed
03 November 2019]
4. Prateek A. (2019) Intelligent Econimist. Income Elasticity of Demand [online], 29 August
2019. Available from: < https://www.intelligenteconomist.com/income-elasticity-of-
demand/> [accessed 03 November 2019]