Question

What is the connection or correlation between the amount of 'friction' in an economy and demand and supply? Does a relationship even exist? How can we quantify the relationship?​ As friction in an economy decreases or increases, how is the demand for a firm's product or service impacted (does anyone remember when a traveler contacted a travel agent instead of Kayak for an airplane ticket, and the ticket was printed and presented to board a flight?)? Does it increase? Does it decrease? How can we measure the impact? How does the elasticity of demand for a firm's products change, if it does change? Are all firms impacted the same? Why or why not?

Answer 1

There exists a correlation between friction in the economy and demand and supply. As the amount of friction in the economy increases, demand and supply in the economy falls. There is never a friction less economy and thus frictions exists which lower the quantity transacted in the market. We can quantify the relationship by removing all the assumptions and computing the change in quantity demanded and supplied as prices in the economy changes.

The frictions lead to fall in the quantity change of the product as the price in the economy changes. It makes the demand for the product relatively inelastic and same is the case with elasticity of supply. No, all the firms might not be impacted in the same way because frictions in different markets are different and also impacts each firm differently and thus impact of frictions is different.