And I would also add-- "Demand, you're being too sensitive!"
Turns out that such incompatibility is difficult not only for human harmony, but also markets!
The price elasticity of demand and supply captures this idea of "sensitivity." We know demand and supply respond to changes in price, but how much do they respond?
Incorporating elasticity into the demand and supply model gives a lot more insight into the discussion of shortages we started last week. While we know consumers increased demand in expectation of lower future supply (aka hoarding), it is also helpful to know about how sensitive this demand is. For items like flour or cleaner, demand is pretty elastic.
According to Dr. Prashant Karunaratne of Mcquarie University:
In an uncertain world, consumers are quite sensitive (elastic) to what they see, especially if it impacts on their physiological and safety needs, and we have a sudden, somewhat rational increase in demand. On the physiological needs side the demand for basic staples has increased, which is why there is a rush for rice, pasta and flour. As for safety needs, the demand for hand sanitizers, sprays and wipes has increased.
As the last post pointed out supply has not adjusted to these large changes in demand, leaving us with empty shelves. The elasticity of supply is closely tied to this.
".. supermarkets, which would otherwise be more profitable if they were able to meet this demand, are not as sensitive (inelastic) in their response due to the time they need to adjust their processes, as well as deeper supply chain issues."
Early on, these "deeper supply chain" issues were mainly due to shutdowns in China. For example, lots of the packaging material for food items comes from China. But, as the virus spread, the supply chain problems are more localized.
Shortages have been top of mind during the pandemic, but believe it or not, surpluses are an issue too!
Remember when crude oil prices went negative a few weeks ago? Or all the Dumped Milk, Smashed Eggs and Plowed Vegetables? Inelastic supply plays a role here. In particular because these commodities are hard to store. Here is what happened with oil. It is more or less the same situation with agricultural markets:
"The supply of oil is also inelastic in the short term. It’s expensive to shut down a producing well, so some producers are willing to keep pumping crude temporarily even at a loss.Storage is ordinarily the buffer that stabilizes inelastic markets. If supply exceeds demand, the excess goes into tanks. But the overproduction has gone on for so long that there’s almost no place left to store crude.
Prices can go outright negative in inelastic markets: The sellers pay the buyers to take it. The natural gas that comes out of the ground as a byproduct of oil production sometimes costs less than zero because it’s viewed as waste. Power generators sometimes pay customers to use electricity because it’s cheaper than shutting down power plants and having to restart them later. Dairy farmers haven’t reached the point of paying people to buy their milk, but they’re dumping what they have because the cows are producing more than the market will bear. (You can’t shut off a cow.)"
