ELASTICITY OF DEMAND

Elasticity of demand is the degree of responsiveness of quantity demanded or demand of a

commodity to change in price or income.
TYPES OF ELASTICITY OF DEMAND
1. Price elasticity of demand.
2. Income elasticity of demand.
3. Cross elasticity of demand.

1. Price elasticity of demand: This is the degree of responsiveness of quantity demanded to

changes in the price of the commodity; that is, how demand reacts as a result of the changes
in the price of the goods or services.

% ∆∈quantity demanded
It is given by where ∆ means change, and % is percentage.
% ∆∈ price

TYPES OF PRICE ELASTICITY OF DEMAND

i. Unitary or unit elasticity of demand.
ii. Elastic demand.
iii. Inelastic demand.
iv. Zero elastic or perfectly inelastic demand.
v. Perfectly elastic or infinite elastic demand.
1. Unitary or unit elastic demand: This is when a change in price leads to an equal
proportion of change in quantity demanded. In this situation, elasticity is equal to one (1)
commonly written as E=1. For instance, a 30% rise in price leads to 30% rise in quantity
30 %
demanded of such commodity; that is, =1.
30 %
Notice that the space between p1∧ p2is the same as that o f q1∧q 2 in the graph of unitary
elastic demand. Also, the demand curve, DD, is neither more of horizontal nor vertical in
slope.

Price
D E=1
Unitary or Unity Elastic
demand

D
Quantity demanded

2. Elastic demand: This is when a change in price brings about a greater than proportionate
change in quantity demanded of such commodity which makes the coefficient of elasticity
to be greater than one, commonly written as E>1. E g when a 40% fall in price leads to 60%
 60 %
rise in quantity demanded; that is, = 1.5. Notice that the space between p1∧ p2is not
40 %
as wide as that o f q1∧q 2 in its diagram. Also, the demand curve, DD, tilt towards being
more horizontal.

Price
E>1
D Price elastic demand

D
Quantity demanded

3. Inelastic demand: This is when a change in price of commodity leads to less than
proportionate change in quantity demanded. In this situation, elasticity is less than one (1)
commonly written as E<1. For instance, 30% fall in price brings about less than 30% in
20 %
quantity demanded. = 0.67
30 %
Notice that the space between p1∧ p2is wider than that o f q1∧q 2. Also, the demand curve,
DD, tilt towards being more vertical.

Price D
E<1
Price inelastic demand

D
Quantity demanded

4. Zero elastic or perfectly inelastic demand: Demand is said to be perfectly inelastic or zero
elastic when a change in price has no effect whatsoever on the quantity of goods demanded.
In other words, the same quantity of goods is demanded irrespective of the changes in price.
 In this situation, elasticity is equal to zero commonly written as E=0 and the demand curve
is always vertical or parallel to the price or vertical axis.

Price
D E= 0
Price perfectly inelastic or
zero elastic demand

Quantity demanded

5. Perfectly elastic or infinite elastic demand: This is when a change in price brings about an
infinite effect on the quantity of goods demanded, in other words, a slight change or increase
in price can make consumers to stop buying while a slight decrease in price will make
consumers to buy all the commodities which makes elastic to be equal to infinite.

Price
E=
Price perfectly elastic or
infinite elastic demand
D

Quantity demanded

MEASUREMENT OF ELASTICITY OF DEMAND OR THE CO-EFFICIENT OF PRICE

ELASTICITY OF DEMAND
1. If the price of sugar per packet increased from ₦10 to ₦15, while quantity bought decreased
from 50 packets to 40 packets, calculate it elasticity or co- efficient of price elasticity.
% change∈quantity demanded
% change∈ price .
In price = ₦15 – ₦10 = ₦5
5
% change in price = × 100 = 50%
10
 Change in quantity demanded = 50 packets – 40 packets = 10 packets
% change in quantity demanded = 50 packets - 40 packets = 10 packets
10
× 100 = 20%
50
% change∈qty dd 20 %
Elasticity = = = 0.4
% change∈Price 50 %

Demand for sugar is inelastic because the change in price leads to lesser proportionate change in
quantity demanded.
Assignment:
Calculate the price elasticity of demand of the information on the table.

Price Quantity Price Quantity

demanded [kg] [₦] demanded [kg]
[₦]
10 40 5 20
8 48 7 16
SOLUTION
Change in price = ₦10 – ₦ 8 = ₦ 2

2
% change in price = ×100 = 20%
10

Change in quantity demanded = 48kg – 40kg = 8kg

8
% change in quantity demanded = ×100 =20%
7

20 %
Elasticity = = 1. That is unitary elasticity.
20 %

INCOME ELASTICITY OF DEMAND

It refers to the degree of responsiveness of demand to changes in income of consumers; that is, it
shows how changes in income of consumers will affect the demanded by consumer.
% change∈quantity demanded
It is expressed as
% change∈income .
E g.
An increase in the income of a consumer from ₦1,500 to ₦2,000 made him to increase the
consumption of meat from 20kg to 30kg.
1) Determine the income elasticity of demand.
2) Explain the co-efficient of income elasticity of demand.

SOLUTION.

Change in quantity demanded = 30kg – 20kg = 10kg.

10
% change in quantity demanded = × 100 = 50%
20
1
Change in income of the consumer ₦2,000 −¿ ₦1,500 = ₦500
500
% change in income × 100 = 33.3%
1,500
1
% change∈quantity demanded 50 %
Income elasticity = = = 1. 5
% change∈income . 33.3 %

Because the percentage change in income leads to greater change in demand by the
consumer, it is elastic. Elasticity is greater than one.

TYPES OF INCOME ELASTICITY OF DEMAND

1. POSITIVE INCOME ELASTICITY OF DEMAND: This occurs when an increase in
income of consumer leads to an increase in quantity demanded of such consumer.
NOTE* It is applicable to normal goods.
2. NEGATIVE INCOME ELASTICITY OF DEMAND: This occurs when an increase in
consumers income leads to decrease in quantity of goods of such consumer
NOTE* It is applicable to giffen goods.

EXAMPLES

INCOME (₦) QUANTITY DEMANDED OF RICE

(KG).
OLD NEW OLD NEW
40,000 50,000 200 280

a. Compute income elasticity of demand

 b. What kind of goods is rice to the consumer?

SOLUTION.
a. Change in qty demanded = 280kg – 200kg = 80kg
80
% change in qty demanded = × 100
200

Change in income = ₦50,000 −¿ ₦40,000 = ₦10,000

10
% change in income = × 100
40

% change∈quantity demanded 40 %
Income elasticity is = = 1.6
% change∈income . 25 %

b. It is elastic because percentage in income leads to greater change in quantity demanded.

Rice to the consumer is a normal good or essential good that is so because when
consumer income rose from ₦40,000 to ₦50,000 his demand for the commodity also
increases from 200kg to 280kg indicating a positive elastic demand.

CROSS ELASTICITY OF DEMAND

Refers to the degree of responsiveness of quantity demanded for a commodity to changes the price
of another commodity; that is, it measures how changes in the price of a commodity will affect the
quantity demanded of another commodity.
NOTE * It is applicable to goods of close substitute as well as complementary goods.
% change∈qty d emanded of commodity X
% change∈ price of commodity Y

The table below shows how the demand for a commodity reacted to the price of another
commodity, use the information in the table to answer the question that follow.
.
PRICE OF OMO (₦) QUANTITY DEMANDED OF
ELEPHANT (KG).
OLD NEW OLD NEW
25 40 150 200

a. Calculate the price elasticity of demand.

b. What kind of goods are OMO and ELEPHANT
SOLUTION:
% change in qty dd of commodity X
% change in price of commodity Y
Change in qty of ELEPHANT = 200packets −¿ 150paclets = 50packets.
50
% change in qty of dd of ELEPHANT ×100 = 33.3%
150

Change in price of OMO = ₦ 40 −¿ ₦25 = ₦15

15
% change in price of OMO = × 100 = 60%
25

333 %
Cross elasticity of demand is = 0.56. This is an inelastic demand.
60 %

OMO and ELEPHANT are close substitutes because when the price of OMO increased from ₦25
to ₦40, the demand for ELEPHANT increase from 150 to 200 packets, it means they are positively
related. They are normal goods or essential goods of close substitute.

FACTORS THAT AFFECT THE ELASTICITY OF DEMAND.

1. HABIT OR STRENGTH OF TASTE: If a person has formed the habit of consuming a
commodity, a change in the price of such commodity will not affect its demand. His/her
demand for such commodity will be inelastic.
2. THE LEVEL OF INCOME: The larger the income of a consumer, the inelastic his
demand for a particular good that has no change in level of demand, a slight increase in
price of such commodity will make no difference while consumer with low income will
adjust to it.
3. POSSIBILITY OF SUBSTITUTION: With commodity of close substitute, the demand
for it would be elastic while commodity without close substitute will be inelastic.
4. THE TIME FACTOR: Elasticity of demand is greater in the long run than in the short
run, in the long run spending habit could change and substitute can be found.
5. NECESSARY GOODS/LUXURIES: Basic necessities have a more inelastic demand
than luxuries, people react more sharply to changes in prices of luxurious goods like T
V, jewelries, e t c.