Chapter 4: Demand and Supply elasticity

What is elasticity? Elasticity is the tendency of solid materials to return to their original shape after being deformed. Solid objects will deform when forces are applied on them. If the material is elastic, the object will return to its initial shape and size when these forces are removed. (Wikipedia)

Wait… what has this got to do with economics? ABSOLUTELY NOTHING, because Maplestory defies almost all rules of physics.

Jokes aside, in economics, elasticity is the measurement of how changing one economic variable affects others. For example:

• "If I lower the price of my product, how much more will I sell?"

• "If I raise the price of one good, how will that affect sales of this other good?"

• "If we learn that a resource is becoming scarce, will people scramble to acquire it?"

An elastic variable is one which responds disproportionately to changes in other variables. Similarly, an inelastic variable is one which changes less than proportionately in response to changes in other variables. (Wikipedia again)

A term that is pretty foreign but important would be ceteris paribus, which means that all other variables except those under immediate consideration are held constant.

Firstly, let’s talk about price elasticity of demand. Here is an example of an inelastic demand:

Originally, the market is able to sell 100 health potions a day at 100 mesos per potion ceteris paribus. Due to rising costs of crafting materials, the price is raised to 150 mesos, and in the process, the market sell 10% less health potions, aka 90 health potions. That means that even though the market increases the price by 50%, it only sells 10% less potions, because health potions are a necessity and there is no reasonable substitute for it, therefore the consumers are forced to adhere to the market prices, and the demand is not affected much.

Similarly, if the market lowers the prices of each health potion to 50 mesos each ceteris paribus, only 10% more potions will get sold. In other words, the price elasticity of demand (Ped) is 10/50, which is 1/5 (Since changes in price and quantity usually move in opposite directions, usually we do not bother to put in the minus sign as we are more concerned with the coefficient of elasticity of demand). What is this random thing called Ped? Price elasticity of demand measures the responsiveness of demand after a change in price.

How do we calculate (the co-efficient of) elasticity of demand?

By taking the percentage change in quantity demanded divided by the percentage change in price, we get the co-efficient of the elasticity of demand.

Back to my example on health potions, the demand for health potions went up by only 10% after the prices dropped by 50%, therefore the Ped is 10/50, aka 1/5.

Now, let’s talk about an example of elastic demand:

An example of an elastic demand would be luxury items such as cars in real life context, and giant potions in Maplestory context. Here is an in-game example: Originally the market is able to sell 100 giant potions at 3 million each a day ceteris paribus. Due to increased production costs, the market feels that 3 million mesos is too little, and thus the average price of each giant potion increases 10% to 3.3 million. After raising the price by 10% to 3.3 million, the market is only able to sell 50 giant potions a day, a 50% decrease in sales. Conversely, if the market decreases the price of giant potions to 2.7 million (10% decrease), the average sales will increase by 50% to 150 giant potions a day.

So how do we calculate the Ped of giant potions?

% change in Quantity demanded (50%) divided by % change in price (10%)

= 50/10 = 5

Therefore Ped is 5 and thus the demand for giant potions is extremely elastic.

Values for price elasticity of demand:

1) If Ped is = 0, demand is perfectly inelastic, demand does not change at all when price changes, and the demand curve will be vertical.

2) If Ped is between 0 and 1 (The % change in demand is smaller than the percentage change in price), then demand is inelastic.

3) If Ped = 1 (The % change in demand is exactly the same as the % change in price, then demand is unit elastic). A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level.

4) If Ped > 1, then demand responds more than proportionately to a change in price, eg. A 20% increase in the price of a good leads to a 40% drop in demand. The price elasticity of demand for this price change is 2 (Or -2 for that matter), and thus the demand is elastic.

Bringing it deeper into the Maplestory context, during the pre-big-bang era, there were many things that were necessities and thus were extremely inelastic, with such items being throwing stars, all-cure potions and magic rocks. Before the big bang patch (2005- mid 2011), items such as throwing stars were necessary for assassins (People who use throwing stars to attack), and thus even though the price might go up by 2 times, people will still need to buy it. Without it, they will either have to make do with the basic stars they are given, or just not attack at all. Furthermore, there are no substitutes for throwing stars, as thieves can only use throwing stars and not arrows. On the other hand, even though the price of throwing stars may drop by 50%, its demand will not move by much as a regular thief only requires about 3 sets of decent throwing stars, as any more would be quite a waste of money and inventory space.

Let’s move on to the elasticity of supply, and here is an example of an inelastic supply:

Summoning rocks were considered a necessity for thieves during the pre-big-bang era as it allowed the use of an extremely powerful skill called shadow partner, which effectively increases your total damage output by 70%. During the pre-big-bang era, the only way to get summoning rocks back then were through monsters which dropped them, thus the supply was pretty inelastic since it cannot be easily made and produced in large numbers quickly. When a new big badass boss came out (such as Zakum), the demand for summoning rocks will surge, but since summoning rocks could not be easily created, the quantity supplied would not change much despite the rise in price (due to sharp increase in demand).

Let’s add in a little bit of math, let’s say that summoning rocks cost 10k mesos each, and about 1000 rocks are being supplied daily. When a new boss comes out, the surge in demand for summoning rocks shoots up, causing prices to rise by 100% to 20k mesos each. However, since the supply of summoning rocks is inelastic, the supply will only increase by 30% to 1300 rocks, due to the fact that despite more people being interested in hunting for summoning rocks, they are unable to do so at a quicker pace as they are almost reaching maximum efficiency. Earlier on I had mentioned about Price elasticity of demand (Ped), so now I will be talking about the Price elasticity of supply (Pes).

Price elasticity of supply measures the relationship between change in quantity and a change in price, meaning that if supply is elastic, producers can increase output without a rise in cost or a time delay, and if supply is inelastic, firms will find it hard to change production in a given period of time. Examples of supply elastic items are cars, jewellery and many luxury items, while things that are supply inelastic are things such as crude oil, gas, and agriculture.

The formula for price elasticity of supply is:

Percentage change in quantity supplied divided by the percentage change in price.

1) When Pes > (More than) 1, then supply is price elastic

2) When Pes

3) When Pes = 0, supply is perfectly inelastic, meaning that no matter how much the price changes, the same amount will still be supplied.

4) When Pes = Infinity, Supply is perfectly elastic following a change in demand.

In the above example, the percentage change in quantity supplied was 30%, while the percentage change in price was 100%. 30 divided by 100 is 3/10, and thus the supply of summoning rocks is inelastic.

Not all supply and demand curves are linear, sometimes, the price elasticity of supply is high at low levels of demand, but when demand is high, elasticity of supply is much lower – the main reason would be that at peak periods, suppliers reach capacity limits and find it hard to increase output in the short run.

A perfect example would be the hackers hunting for Angelic Blessing recipes (More about this in chapter 7). When the demand for angelic blessing increases (Due to the increase in income of the commons, of which more about income elasticity will be explained in the next chapter), the hackers will begin to hack at more and more channels to increase the overall output, however, there is a limitation. Each world only has 20 channels, and the maximum efficiency would be capped at 20 hackers hunting for the Angelic Blessing recipe, thus, the supply curve would start off pretty elastic (Gradient < 1, Pes > 1) at the start, and then start to become less elastic (Gradient > than 1, Pes < 1) towards the end.

In conclusion, a quick summary of elasticity of demand and supply and price changes would be that elasticity determines how much a shift changes quantity versus price.

1) If demand increases and supply is perfectly inelastic, then price rises and quantity does not change.

2) If supply increases and demand is perfectly inelastic, then price falls and quantity does not change.

3) If demand increases and supply is perfectly elastic, then prices stay the same and quantity rises.

4) If supply increases and demand is perfectly elastic, then price stays the same and quantity rises.

End of Chapter 4

Click above for Chapter 5