Value Investing – Elasticity in Economics (Lesson 22)
One of the terms synonymous with the field of economics is ‘Elasticity’. The term refers to the change in either the demand or supply (the other terms synonymous with economics) curve when there is a change in the price. In general, if the price increases a little for consumer goods and the consumers decrease their consumption in significant volume, the goods are considered elastic. Think of it like a rubber band, if there is a lot of change in the rubber band’s tension with very little price change, then the item is elastic (it stretches more) in nature.
On the flip side, if there is a significant price change for a particular good and the demand doesn’t change or changes very little, then the item is considered inelastic or stiff in nature. Based on this model, you should deduce that those needed goods such as housing, food and transportation will have very little change in consumption no matter what happens to the price. The current gas premium (Winter of 2021 – 2022) with the price increase is a perfect example. Consumers might drive a little less, but overall consumption of gas is going to remain relatively flat. Therefore, gasoline is generally considered inelastic. To prove this, will you greatly modify your current driving habit if gas increases to $5 per gallon. It is unlikely because you still have to go to work, you still have to shuffle the kids around and you still need to use the vehicle for your day to day needs. However, you may decrease your discretionary driving, such as planning a trip and so on. But overall, your driving habits will vary little due to the increase or decrease in fuel prices. Again, fuel is a need and therefore considered more inelastic than elastic.
On the flip side of all this are wants in life. If your local restaurant increased
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