Unit 1 – Business and the Business Environment

2.2 Size and scope of organisations

(Part 02 - B)

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§ 2.2.5 Market forces and economic operations - (B)
§ Elasticity of Demand
§ Elasticity of Supply

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What is Elasticity?
§ The measurement of the percentage change of one economic variable in response to a
change in another. It is variable's sensitivity to a change in price relative to changes in other
factors. This can be divided into main 5 catergories which is influential to Demand & Supply,
respectively:

1. Perfectly Elastic Demand/Supply

2. Elastic Demand/Supply

3. Unitary Elastic Demand/Supply

4. Inelastic Demand/Supply

5. Perfectly Inelastic Demand/Supply

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1. Perfectly Elastic Demand/Supply

§ It shows the fact that, the demand is § Decrease in the product price
infinite at a specific price. Thus, a would immediately cause
change in price would eliminate all the supply to shift to zero
demand for the product.

Po

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2. Elastic Demand/Supply

§ A Situation where change in price § A situation where the quantity

causes a bigger percentage change in supplied changes by a larger

demand. percentage than the price change.

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3. Unitary Elastic Demand/Supply

§ A Situation where quantity demanded § A Situation where quantity supplied

change by the same percentage as the change by the same percentage as the
price change. price change.

Demand Supply

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4. Inelastic Demand/Supply

§ A situation where the percent change in § A situation where the percentage

the price of a good or service has less change in quantity supplied changes by

than a 1 percent change in the quantity a lower percentage than the percentage

demanded of price change

Demand Supply

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5. Perfectly Inelastic Demand/Supply
§ A situation where the quantity § A Situation where a change in price does
demanded does not respond to not affect the quantity supplied.
price

Demand Supply

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Types of Elasticity

§ Price Elasticity of Demand –

ü Is an economic measure of the change in the quantity demanded or purchased of a product in
relation to its price change.

ü Price Elasticity of Demand (PED) is always negative, as price and demand have an inverse
relationship.

ü PED can be calculated by using the following mathematical equation:

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§ Based on the value gives from the PED calculation, consumers and the producers can
comment on the responsiveness of the change of price.

Perfectly Elastic

Perfectly
Inelastic

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Determinants of PED

§ Availability of Substitutes
§ Time Period
§ Proportion if income spent on the goods and service
§ Definition of a good
§ Number of uses a good possess
§ Nature of the good

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Determinants of PES

§ Factor Mobility
§ Spare Capacity
§ Time period
§ Ability to keep stocks

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§ Cross Elasticity of Demand –
ü Is an economic measure of the change in the quantity demanded or purchased of a product in
relation to its price change in related goods.

ü XED can be calculated by using the following mathematical equation:

Related Goods
ØSubstitute Goods – E.g. : Coffee & Tea (Positive Relationship, Positive Value)
ØComplement Goods – E.g. : Pen & Ink (Negative Relationship, Negative value)

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§ Income Elasticity of Demand –
ü Is the responsiveness of the quantity demanded for a good to a change in
consumer income.

ü YED can be calculated by using the following mathematical equation:

Types of Good

Ø Normal Goods - A good that experiences an increase in its demand due to a rise in
consumers' income.(Positive Relationship)

Ø Inferior Goods – A good whose demand decreases when consumer income rises. (Negative
Relationship)

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