The core idea
Markets move when supply or demand shifts. The magnitude of the price and quantity response depends on elasticity — how sensitive each side is. Inelastic markets pass shocks into price; elastic markets pass them into quantity. Government interventions (tax, subsidy, tariff) create deadweight loss, and the incidence of that loss splits based on the same elasticity. — after Myatt & Galeotti
The hero diagram
The shock transmission.
A supply or demand shift moves the equilibrium. How much of the move is price vs quantity depends on the slopes.
Mechanisms worth naming
The levers in the machine.
How to apply
When a shock hits your industry.
- Supply or demand shock? Which curve moved?
- How elastic is each side? Inelastic demand + inelastic supply = big price move, small quantity move.
- Who bears the incidence? The more inelastic side absorbs more of the burden.
Key reading · Supply and Demand Shocks · Galeotti
Elasticity determines transmission.
Elastic markets adjust quantities; inelastic markets adjust prices. A manager's job during a shock is to know which side of the market is more elastic — because that is who is about to carry the cost.
Who moves first in the face of a shock? Whoever can.