Elasticity is a measure of responsiveness. That is, how a change in one variable results in a change in another. For example an elastic commodity is one when its prices go up then its demand goes down. In addition when the supply of that commodity increases then the prices of that commodity goes down. As a matter of fact luxurious cars like Lamborghinis and Ferrari are elastic in nature because they are not a necessity and one can always forego their purchase in case of a hike in their prices. That is why their sales have declined since 2007 as the rich have embarked on the purchase of cheaper cars as a substitute.
Recession is a period when the economy slows down; there is an increase in unemployment, reduced business profits and income. At this period the government is usually forced to intervene to counteract the consequences.
Use the concept of elasticity and supply and demand to explain whether or not “rich” people cut back on spending during a recession.
During a recession everyone including the rich people is forced to cut down their spending. This is because the price of commodities becomes high while the means of earning money is limited. Most rich people run their own businesses and as recession strikes business profits start to decline. It is thus evident that these rich people will cut down their spending on luxuries like cars and instead concentrate on improving their businesses. This shows that the demand for these vehicles will decline.
Consequently the elasticity of demand of elastic goods is affected by various factors. One is the availability of substitutes. It happens that the more the substitutes there are, the more elastic the demand will be. For example if the price of Lamborghinis and Ferrari goes up and substitute cars are available then the luxurious class will turn on to the substitutes.
The other thing that stimulates the changes of demand for goods and services is the availability of money to buy those commodities. That is, the demand for goods decreases as a result of an increased price given the fact that the household’s earning does not change. For example if the price of milk goes up then the amount of milk that one purchases will automatically go down. Thus in the context of the rich people they will also be forced to cut down their spending because there is no increase in their income.
Moreover, time also affects the elasticity of demand. For example during a period of recession the rich people may avoid the purchase of luxurious items due to reduced income or the unfavorable economic climate. This will thus reflect a decrease in demand for these items. But as times goes by and the economy booms, business profits will increase as well as household income thus facilitate demand. Time can thus either cause elasticity in demand or inelastic for that matter.
Otherwise elasticity of supply also works in the same way as that of demand. If a price change causes a change in the supply of goods then that is an elastic supply. On the other hand if a price change does not affect the supply of goods then the supply is inelastic.
Price, demand and supply are dependent variables. This is because a change in one variable, say supply causes a change in both price and demand. The flexibility in the change of commodities available and customers demand depends on the prices charged for the same (Koo 179).
Koo, Richard. The Holy Grail of Macroeconomics-Lessons from Japan’s Great Recession. Asia: John Wiley & Sons, 2009.