1.

Elasticity of demand measures the responsiveness of quantity demanded to a change in the

price of a good, price of other goods and income. There are basically three types of elasticity
of demand, namely price elasticity of demand, cross elasticity of demand and income
elasticity of demand.

2.
Price elasticity of demand measures the responsiveness of the quantity demanded of a
product due to change in its price or measure of the extent to which the quantity demanded
of a good changes when the price of the good changes and all other influences on buyers
plans remain the same.
Five degrees of price elasticity of demand:
1) Fairly elastic demand is said to be fairly elastic when the coefficient is larger
than one. The percentage change in quantity demanded is greater than the
percentage in price. In other words, quantity demanded is very responsive to a
change in price as that a small percentage change in price leads to a bigger
percentage change in quantity demanded.

2) Fairly inelastic Demand is inelastic if the coefficient is less than one. This means
that the percentage change in quality demanded is smaller than the percentage
change in price. In short, a percentage change in price leads to a smaller
percentage change in quantity demanded, which shows that quantity demanded
is not very sensitive to a price change.

3) Unitarily elastic Unitary elastic demand exists if the coefficient is equal to one. In
this case, the percentage change in quantity demanded is equal to the
percentage change in price. If price changes by 10 percent, the resulting change
in quantity demanded will also be 10 percent.

4) Perfectly elastic Perfectly elastic demand refers to a demand which is super

sensitive to a price change. A small percentage change in price brings about an
infinite percentage change in quantity demanded.

5) Perfectly inelastic A perfectly inelastic demand has a coefficient of zero. This

means that quantity demanded does not change as the price changes.
3.
Determinants of price elasticity of demand:

 Availability of substitutes Demand is elastic, if the product has many

substitutes and inelastic. For example, if the price of a particular brand of
detergent increases, the quantity demanded for it will fall by a larger
percentage because there are many other brands of substitute detergents.
These substitutes are now relatively cheaper, so the consumers go for it.
 Share of budget spent on the product If consumers have to spend a large
portion of their income on budget on a product, its demanded will be elastic.
Otherwise, the demand will be inelastic.

 Types of product For luxurious, the demand will be elastic, but for necessities
or essentials, the demand will be inelastic. Essentials are things that we
cannot go without or things we must have.

 Habits If demand for a product is associated with some habit, for example
cigarettes with smoking or alcohol drinking habit, their demand will be
inelastic because these products have become necessities to them.
Therefore, a price increase for example will not reduce the quantity
demanded much.
4.
Cross elasticity of demand is the ratio of the percentage change in quantity
demanded of a good or service to a given percentage change in the price of a related
good while Income elasticity of demand is the ratio of the percentage change in
quantity demanded of a good or service to a given percentage change in income.
Next, Cross elasticity of demand determines the type of relationship between two
goods whether it is substitute or complementary goods, if the coefficient is positive it
mean the good was substitute to each other, if the coefficient is negative so the
goods must be a complementary good while Income elasticity of demand provides
information about the type of good or service whether it is luxury good or necessity
good, if the coefficient is positive it must be a normal good, if the coefficient is
negative it must be luxury good. Lastly, the application of cross elasticity of demand
is it can be used for monopoly power while income elasticity of demand, can be
applied in forecasting the future price and as a promotional strategy.
 5. Price elasticity of supply measures the responsiveness of quantity supplied to a
change in the price of a good. It is the ratio of the percentage change in quantity
supplied of a product to a percentage change in its price. It can be calculate using
formula

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

∑p = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

I. Supply is elastic when the coefficient is larger than 1, supply is said to be elastic, that
is, the percentage change in quantity supplied is greater than the percentage change
in price. In other word, quantity supplied is very responsive to a change in price that a
small percentage change in price leads to a bigger percentage change in quantity
supplied.
II. Supply is inelastic if the coefficient is less than 1. This means that a percentage
change in price leads to a smaller percentage change in quantity supplied, showing
that quantity supplied is not very responsive to a price change. An inelastic supply
curve cuts the horizontal axis.
III. Unit elasticity of supply exist when the coefficient is equal to 1. The percentage
change in quantity supplied is equal to the percentage change in price. For example,
if the price changes by 10%, the resulting change in quantity supplied will also be
10%. This supply curve passes through the origin.
6. There are four factors that affect the price of elasticity of supply.First of all is
gestation period.Gestation period refers to the time needed to produce something.If a
product can be made in short period of time,sellers will respond quickly to a price
change.For example,if the price of stationary increases,producers will increase the
quantity supplied immediately,as the gestation period is short.So,in this case,supply
is elastic.On the other hand,if the price of rubber increses,suppliers cannot respond
quickly by increasing the quantity suppied,as it takes years before rubber production
can be increased.So,the supply of rubber is inelastic.
Second factor is time.sometimes supply is inelastic in the short run,because
sellers do not have enough time to respond to a price change.For example,if the
price of tomatoes increases,farmers would love to increase the quantity of tomatoes
supplied.But,in the short duration of time,farmers cannot do much to increase the
production.All they can do is just utilize better kinds of fertilizers or pesticides to
increase production.As a result,the output increases slighty in response to the price
increase,thus supply is inelastic.In the long run,however,the same farmers have
enough time to make adjustments to the price change.They can acquire new land
and grow more tomato and thus can increase the production substantialy in response
to the price increase.Therefore,its supply is elastic in the long run.
Third,the change in production of cost is in responding to an increase in the price
of a product,producers would want to increase their production.For elastic supply, if
producers can pay the labor to work overtime to produce more in order to take
advantage of a higher price.For inelastic supply most towards agricultural compare to
manufactured which is elastic.
Fourth is perishability.Usually,agricultural products are highly
perishable.Example are vegetables,vegetables are highly perishable because they
cannot be stored for a long time and easily get rotten.Thus,it is inelastic supply.For
elastic supply is manufactured products,such as chocolate bars cause they can be
stored for a long time and low perishable.
7. There are 4 factors that can show why agricultural products is inelastic to
manufactured goods.First of all is availability of subtitutes,when the is subtitutes
less,the demand will be inelastic.So,if price increases,people will not reduce its use
very much.
Second,share of budget spent on the product.If consumers spend less portion of
their income or budget on agricultural the demand will be inelastic.
Third,types of products.Since the agricultural products are neccesities among
people and essentials which is cannot go without it while manufactured goods can be
non essentials where consumers can find an alternative way to get other products.
Fourth,time.In short period of time the demand may be inelastic because there
will be difficulties for consumers to find subtitutes that can replace the agricultural
products.Customers also would not have enough time to adjust to a price change
compare to manufactured goods.