As a general rule, if buyers have a greater choice among close substitutes-in-consumption, with more time to respond to price changes, and the expense of buying the good is relatively small, then the demand elasticity is higher. On the supply side, if producers can easily move resources between substitutes-in-production and have more time to respond to price changes, then the supply elasticity is also higher.

Availability of Substitutes

• Elastic Demand: In terms of price elasticity of demand, a good with many close substitutes-in-consumption tends to be very elastic.

  Consider the example of Auntie Noodles Frozen Macaroni Dinner, an enjoyable, nutritious, and satisfying meal. Unfortunately for the Auntie Noodles company, it is only one of thousands of comparable food products on the market, making demand extremely elastic.

  A buyer can easily opt for Uncle Doodles Frozen Macaroni Dinner or Grammy Poodles Frozen Macaroni Dinner, both of which are equally enjoyable, nutritious, and satisfying meals. A whole bunch of enjoyable, nutritious, and satisfying non-macaroni pasta meals, such Freddie Franks Linguini and Delicious Daves Spaghetti, are also available. Other substitutes include frozen meat entrees, TV dinners, boxed noodle packages, and meat helpers. Then there are fast food franchises, take-out delicatessens, fancy-schmancy dine-in restaurants, and other food eating alternatives.

  The wide range of very close substitutes for Auntie Noodles Frozen Macaroni Dinner means that the price elasticity of demand for Auntie Noodles Frozen Macaroni Dinner is quite high. Should Auntie Noodles Frozen Macaroni Dinner prices increase even a small, teeny, tiny bit, potential buyers are bound to forego Auntie Noodles Frozen Macaroni Dinner in favor of the very close substitutes.



• Inelastic Demand: Alternatively, a good with few close substitutes-in-consumption tends to be more inelastic.

  Consider the market for Merciless Monolithic Media Masters (4M) Cable Television services offered to the television-watching citizens of Shady Valley. As the only provider of cable television in Shady Valley, the good folks of 4M provide a unique service with very few close substitutes.

  The best substitute comes from the national broadcast networks relayed through the local affiliates in nearby Oak Town. The reception is bad, only five channels are available (compared to 100 offered by 4M). Other entertainment activities are available in Shady Valley, including the summer time athleticism of the Shady Valley Primadonnas baseball team (featuring Harold "Hair Doo" Dueterman), the Shady Valley Cineramaplex (with 20 movie screens featuring the latest Brace Brickhead adventures), and the Shady Valley Dinner Theater (with performances by Max Mulroney and his Shakespearean Players).

  These are not very close substitutes for 4M cable television. Seeing the Shady Valley Primadonnas in person is not the same as watching the New York Yankees play on cable television. Sitting in a movie theater among a bunch of popcorn-chomping, soda-pop-slurping, baby-crying, end-of-the-movie-away-giving Cineramaplex patrons is not the same as watching a first run Brace Brickhead feature film on pay-per-view cable with a well-stocked refrigerator nearby. And the entertainment value offered by the performances of Max Mulroney and his Shakespearean Players is quite different from watching television sit-coms.

  The lack of close substitutes means the price elasticity of demand for 4M cable television services is very small. 4M cable television can raise prices substantially without seeing many people switch to the alternatives.



• Elastic Supply: In terms of price elasticity of supply, a good with many close substitutes-in-production tends to be very elastic. The key for supply is the ease of switching resources between the production of two or more goods

  The production of Manny Mustard's Deluxe Club Sandwiches has a lot of very close substitutes. The labor (tomato slicers, lettuce washers), capital (knives, toasters), and materials (ham, lettuce, cheese, barbecue sauce) used to produce Manny Mustard's Deluxe Club Sandwiches can be switched easily between other goods. By tomorrow the guy who slices tomatoes for Manny Mustard's Deluxe Club Sandwiches can be selling hot dogs at the Shady Valley Primadonnas baseball stadium. Barbecue sauce that could have been used as a condiment for Max Mulroney's Pretzels-on-a-stick is easily switched to the production of Manny Mustard's Deluxe Club Sandwiches.

  As such, the price elasticity of supply of Manny Mustard's Deluxe Club Sandwiches is likely to be quite high. Relatively small changes in the price of Manny Mustard's Deluxe Club Sandwiches is bound to trigger relatively large changes in the quantity supplied as resource inputs are easily switched among substitutes.



• Inelastic Supply: Alternatively, the production of a good with few close substitutes-in-production tends to have a relatively small price elasticity of supply.

  The entertainment provided by the Shady Valley Primadonnas baseball team offers an example. Super star players like Harold "Hair Doo" Dueterman are rare. The skill, talent, and experience of Hair Doo cannot be found easily in the production of other goods. The guy who slices Manny Mustard's tomatoes is not likely to join the Shady Valley Primadonnas and perform at the super star status of the rest of the team without considerable training and practice.

  As such, the price elasticity of supply of Shady Valley Primadonnas baseball entertainment is likely to be quite low. Relatively large changes in the price of Shady Valley Primadonnas baseball entertainment is needed to induce relatively small changes in the quantity supplied.

Time Period of Analysis

• For Demand: The demand for 4M Cable Television is clearly not very elastic. Given the lack of close substitutes, buyers continue buying even though prices rise. This is especially true for brief periods like weeks or months. But given enough time (years? decades?) buyers are able to seek out alternatives and thus change their quantity demanded.

  If 4M Cable Television raises prices, buyers will eventually buy season tickets to the Shady Valley Primadonnas baseball team, season tickets to the Shady Valley Dinner Theater, and spend a lot of time at the Shady Valley Cineramaplex. Buyers might even purchase a satellite dish system or explore other emerging entertainment technologies.



• For Supply: The supply of Manny Mustard's Deluxe Club Sandwiches is quite inelastic if the time period is limited to a few hours. In this short time frame Manny is unable to acquire the resources needed to increase the quantity supplied even with substantial price increases. The price might double, but Manny simply cannot find the resources needed to expand production.

  However, if Manny has a longer time period to adjust, say a couple of months, then he will have the time needed to respond to the higher price. Good-bye Shady Valley Primadonnas stadium hot dog vendor, hello Manny Mustard tomato slicer. Less barbecue sauce for Pretzels-on-a-stick, and more barbecue sauce for Deluxe Club Sandwiches.

Proportion Of Budget