Last update: 10 September 2013

Lecture 6
Objectives of lecture
 To explain concept of elasticity.
 To explain price and income elasticity of demand and price elasticity of supply.
 To note the significance of price elasticity for revenue.
 To explain the importance of the concepts in terms of the exports of LDCs.

Contents of lecture
Elasticity in general
 Elasticity means “responsiveness”

Price elasticity of demand

 This refers to the responsiveness of the quantity demanded to a change in price.
 If the percentage change in demand is greater than that of price then demand is
said to be price elastic.
 If the percentage change in demand is less than that of price then the demand is
said to be price inelastic.
 If both the change in demand and price are equivalent there is said to be unit
price elasticity of demand.
 The sign for price elasticity of demand is negative indicating that quantity
demanded changes in the opposite direction to price.
 Revenue will typically rise in the case of a price elastic demand curve if the price
falls. Revenue will rise in the case of a price inelastic demand curve if price rises.

Income elasticity of demand

 This refers to the responsiveness of the quantity demanded to a change in income.
 If the percentage change in demand is greater than that of income then demand is
said to be income elastic.
 If the percentage change in demand is less than that of income then the demand is
said to be income inelastic.
 If both the change in demand moves in the opposite direction to income (as in the
case of so-called inferior goods) then there is said to be negative income elasticity
of demand.

Price elasticity of supply

 This refers to the responsiveness of the quantity supplied to a change in price.
 If the percentage change in supply is greater than that of price then supply is said
to be price elastic.
 If the percentage change in supply is less than that of price then the supply is said
to be price inelastic.
 If both the change in supply and price are equivalent there is said to be unit price
elasticity of supply.
Price and income elasticity and LDC exports
 The problem for primary product LDC exporters is that demand for their
product tends to be price elastic (when price falls in a downward direction),
income inelastic, and the supply of their products, especially export products,
price inelastic.