LECTURE 15

ELASTICITY OF DEMAND FOR

AGRICULTURAL PRODUCT
LEARNING OUTCOMES
• Types and importance of elasticity of demand
• Factors that affect total income
• Factors that affect the elasticity of demand
 THE ELASTICITY OF DEMAND
Definition

• Measures a change in demand for a

Demand good when another economic factors
Elasticity changes.

• A measure of the responsiveness of

Price quantity demanded to price changes
elasticity of • Indicates how much buyers’ quantity
demand demanded will change when prices
change
Formula of elasticity of demand

Price 𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

elasticity of =
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
demand
 Formula of elasticity of demand

Change in
price

𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
𝒄𝒉𝒂𝒏𝒈𝒆 Change in price
Price
elasticity
𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
= 𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
of demand
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
 elasticity of demand

Exercise 1 :
As the price of apples rises from $3.8 to $4.2, the quantity demanded falls from 200
to 120. Calculate elasticity of demand for apple.
𝑵𝒆𝒘 𝒗𝒂𝒍𝒖𝒆 − 𝑶𝒍𝒅 𝒗𝒂𝒍𝒖𝒆
𝑶𝒍𝒅 𝒗𝒂𝒍𝒖𝒆

• % change in QD = 120−200
200
$4.2 − $3.8 ED
40%
= 10%
%change in P =
$3.8
−80
=
200 ED = 4
$0.4
=
= −0.4 𝑥 100% $3.8

= 0.1
= −40%
= 10%
# QD reduce by 40%
# P increase by 10%
 elasticity of demand

Exercise 2 :
As the price of a mini hi-fi system falls from $2500 to $2000, the quantity demanded
rises from 350 to 550. Calculate the elasticity of demand for a mini hi-fi system.
$2000 − $2500
550 − 350 %change in P = 60%
$2500
% change in QD =
350 ED =
20%
200 −$500
= =
350 $2500 ED = 3
= 0.6 𝑥 100% = −0.2𝑥100%

= 60% = −20%

# P decrease by 20%
# QD increase by 60%
Exercise
Suppose that you own a company that supplies vending machines.
Currently, your vending machines sell soft drinks at $1.50 per bottle.
At that price, customers purchase 2,000 bottles per week. In order to
increase sales, you decide to decrease the price to $1, and sales
increase to 4,000 bottles. Calculate the elasticity of soft drinks.

Answer : 3
Importance of elasticity of demand

Helps firms estimate the potential change in demand due to

changes in the:

price of a good
Effect of changes in prices of other goods
Other important market factors

Guides firms toward more optimal competitive behavior and

allows them to make precise forecasts of their production needs.
can be used to predict total revenue changes from price changes
 importance of elasticity of demand in
management

• Main areas of importance of elasticity of demand in management:

1. In the Determination of Output Level

❑ For making production profitable, it is essential that the
quantity of goods and services should be produced
corresponding to the demand for that product.

2. In the Determination of Price

❑ the basis of its price determination. The ratio in which the
demand for a product will fall with the rise in its price and vice
versa can be known with the knowledge of elasticity of
demand.
 IMPORTANCE OF ELASTICITY OF
DEMAND IN MANAGEMENT
3. In the Determination of Government Policies

❖ The knowledge also so helpful for the government in

determining its policies. Before imposing statutory price
control on a product, the government must consider the
elasticity of demand for that product.

❖ The government decision to declare public utilities on

industries whose products have inelastic demand and are
in danger of being controlled by monopolist interests
depends upon the elasticity of demand for their products.
 IMPORTANCE OF ELASTICITY OF
DEMAND IN MANAGEMENT
4. Helpful in Adopting the Policy of Protection

❖ The government considers the elasticity of demand of

the products of those industries which apply for the
grant of a subsidy or protection. Subsidy or protection is
given to only those industries whose products have an
elastic demand.
As a consequence, they are unable to face foreign
competition unless their prices are lowered through sub-
sidy or by raising the prices of imported goods by imposing
heavy duties on them.
TYPES OF ELASTICITY

01 Elastic Demand
02 Inelastic Demand
03 Perfectly Inelastic Demand
04 Perfectly Elastic Demand
05 Unitarily Elastic
 01 Elastic Demand

❑ Elastic demand is when the percentage change in the

quantity demanded exceeds the percentage change in
price. That makes the ratio more than one.
% change in % change in
quantity demanded > price

❑ The quantity demanded will change much more than

the price.
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
𝒄𝒉𝒂𝒏𝒈𝒆
Price
𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
elasticity = 𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 >1
of demand
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
 01 Elastic Demand

❖ Agriculture products with an elastic demand are

normally consumer durables and have many close
substitutes.

❖ These are items that are purchased infrequently

and can be postponed if price rises.

❖ Example : Vegetables (Cabbage, salads), fruits

(Manggo, Apple, Citrus).
 02 Inelastic Demand
❑ Inelastic demand is when the percentage change in the
quantity demanded less than the percentage change in
price. That makes the ratio less than one.
% change in % change in
quantity demanded
< price

❑ The quantity demanded doesn't change as much as the

price.

𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
Price 𝒄𝒉𝒂𝒏𝒈𝒆
elasticity =
𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 <1
of demand 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
 02 Inelastic Demand

❖ Inelastic demand is when people buy about the same

amount whether the price drops or rises.
❖ These goods tend to be things that are more of a
necessity to the consumer in his or her daily life.
❖ Example : gasoline, salt, sugar
❖ Even if there is a drop in price of salt, people still purchase
just enough amount needed.
 03 Perfectly Inelastic Demand
❑ A perfectly inelastic demand is a demand where the
quantity demanded does not respond to price.

% change in price
❑ When demand is perfectly inelastic, quantity
demanded for a good does not change in response
to a change in price.

𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
𝒄𝒉𝒂𝒏𝒈𝒆
Price
𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
elasticity = 𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 =0
of demand
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
 03 Perfectly Inelastic Demand

❑ The consumer would purchase the same amount of a

good or service at every price.

❑ This type of demand occurs when consumers have no

substitute goods to meet their needs; a perfectly inelastic
supply occurs when supplies have no substitute goods to
produce.

❑ Example : Emergency services, lifesaving drug (insulin),

electricity (TNB)
 04 Perfectly Elastic Demand

❑ A perfectly elastic demand is a demand where a

small change in price causes=an∞infinite change in
the quantity demanded. =
❑ When the price changes, the quantities change to
infinity.
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
𝒄𝒉𝒂𝒏𝒈𝒆
Price
𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
elasticity = 𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 =∞
of demand
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
 04 Perfectly Elastic Demand

❑ This can be interpreted as consumers being very

sensitive to changes in price: a 1% increase in price
will lead to a drop in quantity demanded of more
than 1%.

❑ The demand is infinite at a specific price. Thus, a

change in price would eliminate all demand for the
product.

❑ The price may change if consumers have access to a

large number of substitute goods that can meet their
needs or if suppliers have a large number of
substitute goods that they can produce.
 05 Unitarily Elastic

❑ A unitarily elastic demand is a demand where the

proportion of change in demand is equal to
proportion of change in price.
% change in = % change in price
quantity demanded

❑ One percent change in price results a one percent

decline in the amount of product demanded.
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
Price 𝒄𝒉𝒂𝒏𝒈𝒆
elasticity =
𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆
=1
of demand
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
Elasticity of Demand
Total Revenue
• Total revenue means the amount of money
obtained by producers.

• It is the same as the total expenditure paid by

consumers the total market value of the goods
transacted .
Total Revenue

Total Revenue

• Total revenue (TR) equals

price multiplied by
quantity
TR = P x Q
Total Revenue
• If price and quantity
change, total revenue
will also change.

Price decrease from P1 to P2:

Original total revenue = A

New total revenue = AC

Elasticity of demand and total
revenue
For the uncertain cases, the elasticity of demand determines the
change in total revenue.

Elasticity of Price Quantity Total Revenue

Demand Demanded
Inelastic

Elastic
Elasticity of demand and total
revenue
INELASTIC DEMAND

• When price increases and

quantity decreases,
decreases in revenue is
smaller than increase in
Gain revenue.
Gain
• Gain in TR > Loss in TR
• Total revenue increases.
Loss
s
Los
Elasticity of demand and total
revenue
INELASTIC DEMAND

• When price decreases and

quantity increases,
decreases in revenue is
greater than increase in
revenue.
Loss
Gain
• Gain in TR < Loss in TR
• Total revenue decreases.
Gain
s
Los
Elasticity of demand and total
revenue
ELASTIC DEMAND

• When price increases and

quantity decreases,
decreases in revenue is
greater than increase in
Gain revenue.
• Gain in TR < Loss in TR
Loss
• Total revenue decreases.
Elasticity of demand and total
revenue
ELASTIC DEMAND

• When price decreases and

quantity increases,
decreases in revenue is
smaller than increase in
Lost revenue.
• Gain in TR > Loss in TR
Gain
• Total revenue increases.
 Change in total revenue

1. Shift in supply curve ▪ Due to non-price determinants, shift in supply

curve will occurs in two conditions:

▪ Shift to right (at the same price);

▪ Total revenue increase
P
▪ Shift to left (at the same price);
▪ Total revenue decrease

▪ Eg : if a new technology makes production

cheaper, the supply curve moves to reflect that
the business can produce more goods for the
same price. The company can sell more of its
product for the same price as before.
Change in total revenue
2. Excess supply • When, product supplied is in excess,
price need to be push down to
increase the demand of product.

• Thus, the equilibrium market will be

achieved.
• Total revenue after decline in price;
TR gain > TR Loss

• Total revenue increase

Change in total revenue
3. Shift in demand curve
▪ Due to non-price determinants,
shift in demand curve will occurs in
two conditions:

▪ Shift to right (at the same

price);
▪ Total revenue increase

▪ Shift to left (at the same price);

▪ Total revenue decrease
Change in total revenue
4. Case of disequilibrium : Fixed quantity transacted
▪ Due to some external/ internal factors, only a fixed
quantity of products can be supply to the market.
▪ Causing excess in demand for that product in the
market.
▪ Thus, total revenue will fluctuate.

▪ Eg: limited luxury products.

Change in total revenue

5. Case of disequilibrium:
Excess supply with a fixed price

▪ Due to some external/ internal factors, the products

have a fixed price.
▪ Producers supply more than demand in market.
▪ Thus excess supply occur in a market.
▪ Eg: government set price ceiling for local rice.
 Factors affecting the
elasticity of demand
AVAILABILITY OF SHARE IN TOTAL
01 SUBSTITUTES 05 EXPENDITURE

NATURE OF POSTPONEMENT OF
02 COMMODITIES 06 CONSUMPTION

NUMBER OF
03 HABITS 07 USES

TIME PERIOD
04 08 INCOME LEVEL
 Factors affecting the
elasticity of demand
1.Availability of Substitutes
✓ Availability of close substitutes makes the demand
sensitive to change in the prices.
✓ Demand for a commodity with large number of
substitutes will be more elastic. The reason is that even a
small rise in its prices will induce the buyers to go for its
substitutes.
✓ Commodities with few or no substitutes like wheat and
salt have less price elasticity of demand or inelastic
demand.
 Factors affecting the
elasticity of demand
2.Nature of Commodities
❖ Elasticity of demand of a commodity is influenced by its
nature. A commodity for a person may be a necessity, a
comfort or a luxury.
❖ When a commodity is a necessity like food grains,
vegetables, medicines, etc., its demand is generally
inelastic as it is required for human survival and its
demand does not fluctuate much with change in price.
❖ When a commodity is a comfort like fan, refrigerator,
etc., its demand is generally elastic as consumer can
postpone its consumption.
 Factors affecting the
elasticity of demand
3.Habits
✓ Commodities, which have become habitual necessities for
the consumers, have less elastic demand. It happens
because such a commodity becomes a necessity for the
consumer and he continues to purchase it even if its price
rises.
✓ Example : Alcohol, tobacco, cigarettes.
 Factors affecting the
elasticity of demand
4.Time Period
✓ Elasticity of demand varies directly with the time period.
Demand is generally inelastic in the short period.
✓ It happens because consumers find it difficult to change
their habits, in the short period, in order to respond to a
change in the price of the given commodity.
✓ However, demand is more elastic in long rim as it is
comparatively easier to shift to other substitutes, if the
price of the given commodity rises.
 Factors affecting the
elasticity of demand
5. Share in Total Expenditure
✓ Proportion of consumer’s income that is spent on a particular
commodity also influences the elasticity of demand for it.
Greater the proportion of income spent on the commodity,
more is the elasticity of demand for it and vice-versa.
✓ Demand for goods like salt, needle, soap, match box, etc. tends
to be inelastic as consumers spend a small proportion of their
income on such goods. When prices of such goods change,
consumers continue to purchase almost the same quantity of
these goods.
✓ However, if the proportion of income spent on a commodity is
large, then demand for such a commodity will be elastic.
 Factors affecting the
elasticity of demand
6. Postponement of Consumption:

✓ Commodities like biscuits, soft drinks, etc. whose demand

is not urgent, have highly elastic demand as their
consumption can be postponed in case of an increase in
their prices.
✓ However, commodities with urgent demand like life
saving drugs, have inelastic demand because of their
immediate requirement.
 Factors affecting the
elasticity of demand
7. Number of Uses:

✓ If the commodity under consideration has several uses,

then its demand will be elastic. When price of such a
commodity increases, then it is generally put to only more
urgent uses and, as a result, its demand falls. When the
prices fall, then it is used for satisfying even less urgent
needs and demand rises.
 Factors affecting the
elasticity of demand
8. Income Level:

✓ Elasticity of demand for any commodity is generally less

for higher income level groups in comparison to people
with low incomes. It happens because rich people are not
influenced much by changes in the price of goods. But,
poor people are highly affected by increase or decrease in
the price of goods. As a result, demand for lower income
group is highly elastic.
 Factors affecting the
elasticity of demand
9. Level of Price:

✓ Level of price also affects the price elasticity of demand.

Costly goods like laptop, Plasma TV, etc. have highly
elastic demand as their demand is very sensitive to
changes in their prices. However, demand for inexpensive
goods like needle, match box, etc. is inelastic as change in
prices of such goods do not change their demand by a
considerable amount.
THE END