BED 1101 Introduction to Microeconomics

BED 1101: INTRODUCTION TO MICROECONOMICS

4. ELASTICITY OF DEMAND
It can also be defined as a measure of the extent to which the quantity demanded of a good responds to
changes in one of the influencing factors.

Price elasticity of demand may be defined as ‘’Responsiveness of quantity demanded to change in

price’’. It is a measure of responsiveness of quantity demanded to a change in the price of a good,
ceteris paribus. In other words it is the ratio at which demand changes due to change in price level.

In the words of Prof. Mrs. Robinson, the elasticity of demand at any price or any output is the
proportionate change in amount purchase in response to a small change in quantity demanded divided
by the proportionate change in price e.g.

Elasticity of demand = Proportionate change in quantity demanded

Proportionate change in price

ed = q/q
p/p

ed = 8 – 10 ÷ 4 -3

10 3
= - 0.6
Elasticity is always negative.

TYPES OF ELASTICITY OF DEMAND

1. Elastic demand (more elastic demand) ( ed<1). The Quantity demanded changes more than
proportionately in response to a given change in price: A little change in price leads to a greater
change in demand.

D D A small change in price is accompanied

P by a more than proportionate
P1 change in quantity
D demanded.
Price

D
0 m m1
Demand

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BED 1101 Introduction to Microeconomics

2. Inelastic demand (less elastic demand) ( ed>1). The Quantity demanded changes less than
proportionately in response to a given change in price. i.e A big change in price result in a very little
change in quantity demanded.
D A bigger change in price is accompanied by
P R a small than proportionate change in quantity
demanded
Price

P R D

m m1
Demand

3. Unitary elasticity ( ed=1).

Proportionate change in price brings about equal proportionate change in demand.
Y D
P

P1
Price

D
0 m m1 X
Demand

4. Perfect elastic demand or infinite elastic demand ( ed=∞). Demand for any commodity is infinite
at any price.
Y
An insignificant small reduction in price leads
D D to an unlimited extension of demand and even
An insignificant small rise in price causes
demand to fall to zero.
0 Demand X

5. Perfectly inelastic demand ( ed=0)– However much the price may change (rise or fall) the amount
demanded remains the same.
Y

P
P1

0 Demand X
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BED 1101 Introduction to Microeconomics

ed>1

ed=0
ed<1

FACTORS ( DETERMINNANTS) OF ELASTICITY OF DEMAND

There are several factors which determine elasticity of demand. These include:-
1. For necessaries of life demand is less elastic. This is because these commodities are
purchased whatever the price may be. The change in price does not matter so far as
demand for such commodities is concerned e.g. cloth, maize flour, rice etc.
2. Demand for luxuries is more elastic – the demand for luxuries is more elastic in the sense
that a little change in price level brings a greater change in demand e.g. TV. Set.
3. Availability of substitute. The more substitute a good has, the more elastic the demand for it
is likely to be. - for example when price of tea rises, demand for tea will decrease to a great
extent because more coffee will be demanded.
4. Demand for goods the use of which can be postponed is more elastic e.g. when building
material is very costly, the building activities are very much reduced and vice versa.
5. The proportion of consumers income spent on the good- goods like cars, which take up
large proportion of consumers’ incomes tend to have amore elastic demand than goods,
like salt, up only a very small proportion of consumers’ incomes.
6. Time: Since it may take time for buyers to react to changes in price, the demand for many
goods may be inelastic in the short run but more elastic in the long run.

ELASTICITY OF SUPPLY

Elasticity of supply is a measure of the extent to which the quantity supplied of a

good responds to changes in one of the influencing factors.

Elasticity of supply can also be defined as the ratio at which supply changes due to
change in price level..

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BED 1101 Introduction to Microeconomics

Price elasticity of supply is a measure of the responsiveness of quantity supplied to a

change in the good’s own price ceteris paribus.

The elasticity of supply can be measured/calculated by the help of the following

formula:_
Price elasticity of supply = Proportionate change in quantity supplied
Proportionate change in price
Or

= Change in supply original supply

Change in price original price
q/q
es = p/p

Where q/q represents the proportionate change in quantity supplied and p/p represent
the proportionate change in the good’s price.

es = is always positive e.g.’ supply changes in the same direction in which price
changes
Types Elasticity of supply

1. Elastic (More elastic) Supply(es>1) . The quantity supplied changes more

than proportionately in response to a given change in price. i.e when due to a

little change in price, supply changes to a great extent.

2. Inelastic (less elastic) supply(es<1): When a given percentage change in price

causes a smaller percentage change in quantity i.e when due to a big change
in price level, supply changes to a little extent

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BED 1101 Introduction to Microeconomics S

P1

0 Q Q2

3. Unitary supply(es=1) – percentage change in quantity supplied is exactly

equal to the percentage change in price

P1

Q Q1
DQ

4. Inelastic perfect supply (es=0)

S This means that a fixed quantity of 0Q1 will be

supplied at any price. It will even be supplied at
zero price.

0 Q1
Quantity per time period

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BED 1101 Introduction to Microeconomics

5. Elastic perfect supply(es=∞) In this case nothing at all will be supplied

at prices below 0P1; any amount will be
supplied at 0P1presumably ( unless the

S supplycurve eventually turns upward) an

P1 S infinite quantity will be supplied at prices
above 0P1

0
Quantity per time period

Factors (determinants) of elasticity of supply

1. Nature of commodity – commodities which are durable or can be kept for a
long time have a greater elasticity of supply. Perishable commodities have
less elastic supply.
2. Cost of production
The commodities which have too high cost of production have less elastic
supply and vice versa
3. Time
Those commodities which are produced in a short period have grater
elasticity and vice versa.
4. Method of production
The commodities which have to be produced with the help of simple method
of production have more elasticity and if the method of production is
complicated, supply will be less elastic.
5. Laws of returns
The commodities which are produced under the conditions of increasing
returns have greater elasticity of supply and the commodities which are
produced under the conditions of dismissing returns have smaller elasticity of
supply.

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