Is it tense, or is it… awkward? Price tension is when a seller and a buyer are not on the same page.
"Okay...you can have this plumbus for $40," the seller might say. The buyer says, "Uhhh, I could get a plumbus X for $45. I’ll take your older version for no more than $30." The bid-ask spread, or price tension, for the pre-X plumbus is $10 on the plumbus market.
In markets of mismatched buyers and sellers, fewer transactions happen. Business is slow, which mean liquidity is low. For illiquid assets, like old plumbuses (yes, used), limit orders are often used, which is where you set the max price at which you’ll buy it if it ever lowers to that amount (or vice versa if you’re selling). Waiting for that price tension to ease up...can take a while.
Related or Semi-related Video
![Econ: What are Elasticities of Supply and Demand?](https://media1.shmoop.com/video/thumbnails/ECON.FINANCE.321_770x433.jpg)
Econ: What are Elasticities of Supply an...7 Views
and finance Allah shmoop What are elasticity Sze of supply
and demand All right people when we're talking elasticity and
economics were talking about how responsive one thing is to
something else Like what if your brother snapped your arm
with rubber band Yeah if you reacted wildly While you're
very responsive to the change which means your elastic to
being rubber band snapped if you remain stoic as a
monk unmoving and un reactive you're in the elastic to
being rubber band snapped with the elasticity of supply and
demand were measuring the change in quantity as a response
to a change in price Will the price elasticity of
demand asks if price changes by n percent How does
the quantity demanded change in the technical sense Price elasticity
of demand is the percent change in quantity demanded divided
by the percent change in price OK well even in
the Monkey Kingdom we can measure the elasticity of demand
For instance there was a time when a monkey could
buy one banana for three back scratches a high price
But now a monkey can get one banana for the
price of one back scratch much much cheaper than before
in fact well it's a third the price since the
price of bananas changed well How did the quantity of
bananas demanded in the Monkey Kingdom change well since bananas
or cheaper now than they were before And since monkeys
loves me some bananas will The demand for bananas has
increased which means the demand for bananas moves down that
the band curve to a higher quantity and a lower
price like write down here But how many more bananas
were demanded Exactly The world wants to know if the
quantity of bananas demanded didn't increase that much Even with
such a drastic price reduction well then the monkeys would
have any elastic demand for bananas on the graph That's
when the price change looks a lot bigger than the
quantity change like when price elasticity of demand is less
than one while the good is considered to have any
elastic demand If instead the monkeys went bananas for bananas
demanding many many many more bananas in response to the
price drop well then it would be considered a relatively
elastic demand when price elasticity of demand is greater than
one Well then the goods considered to have elastic demand
well if we think back to the elasticity of demand
equation this makes sense like how much quantity changed is
on top and how much price changed is on the
bottom right there When quantity changes more than price our
equation is top heavy which means it'LL be larger than
one when quantity changes less than price Well it goes
the other way right Okay when consumers will buy a
lot more of something if the price drops or a
lot less of something when the price rises that good
has elastic demand It's stretchy when consumers keep buying a
similar amount of the good Even if the price changes
that good is in the elastic Let's take a look
at elasticity of supply from the banana supply Your perspective
The price elasticity of supply asks if price changes by
X percent How does the quantity supplied change Well the
price elasticity of supplies The percent change in quantity supply
divided by the percent change in price the higher the
price that banana suppliers can sell their bananas for well
the more bananas they'LL want to sell right The lower
the price the bananas with less They'LL want to sell
if we take our same case where banana prices decreased
by two thirds were only a third of the original
price Well how does that affect quantity of banana supplied
First of all why would the price of bananas decreased
Well if producers are priced takers it means their price
depends on consumer demand for the good In this case
a drop in the demand for bananas by consumers would
lead to a drop in prices So how does it
drop in consumer demand Change the quantity supplied Well if
the banana producer were elastic it means there's a large
drop in banana supplied compared to the price drop Remember
the more elastic something is the more drastic the response
as with elasticity of demand a goods supplies considered elastic
if the elasticity is bigger than one Well if banana
producers were relatively in elastic to a drop in price
than the quantity shrunk a small amount compared to the
price drop in elastic supply means the price elasticity of
the good is less than one Just as with any
elastic command Okay so you might be wondering why some
goods are more elastic imply Some are less elastic The
price elasticity of demand can change when prices change when
income changes and when substitute goods are available right The
effect of crisis and income changes are similar since they
both change your buying power in the market Right Substitute
goods are well a bit different say the price of
bananas dropped by two thirds because the substitute good became
available on the market Yes plantains were looking atyou Plantains
are no bananas but they're similar enough to be cutting
into the banana market when substitute goods cut into another
goods market well that goods demand usually drops causing a
price drop So for consumers it's a change in how
much cash is in your pocket and your alternative options
on the market So what about four suppliers Well the
price elasticity of supplies largely dependent on their production constraints
In other words how much control do suppliers have in
raising supply Because well sometimes they don't too much For
instance if there was a hurricane that wiped out a
slice of the usual supply of bananas banana supply will
be lower There's nothing suppliers can really do about it
when supply can't be increased in response to an increase
in demand Well the supply elasticity is in elastic Another
good example of an elastic supply is parking there just
some days when there's high demand for parking Yes supply
does not rise to meet that demand You can't just
get out your asphalt paving truck and throw down and
new spots or a thousand new spots to accommodate that
line of Tesla's forming at the garage entrance there Both
of these cases are examples of limited production capacity Other
factors that can affect the price elasticity of supply Well
firm stockpiling whether it's easy for firms to switch up
their production process and how long it takes firms to
produce new goods There wouldn't be a banana shortage if
we could get bananas to grow like bamboo But way
can't like Monkeys were sensitive to change price change That
is whether you're a consumer or a producer You have
immeasurable elasticity Deep down inside of you telling you how
to respond to price changes All you have to do
is put your banana down in Just listen for a
second really
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