Textile and Apparel

Management
Lecture 4
Elasticity and Inelasticity of Demand
 Inelasticity and elasticity of demand refer to
the degree to which demand responds to a
change in another economic factor, such as
price, income level, or substitute availability.
Elasticity measures how demand shifts when
other economic factors change. When
fluctuating demand is unrelated to an
economic factor, it is called inelasticity.
Elasticity of Demand

 The elasticity of demand, or demand

elasticity, refers to how sensitive demand for
a good is compared to changes in other
economic factors, such as price or income. It
is commonly referred to as
price elasticity of demand because the price
of a good or service is the most common
economic factor used to measure it.
Elasticity of Demand

 An elastic good is defined as one where a change in price

leads to a significant shift in demand. In general, the
more substitutes there are for an item, the more elastic
demand for it will be.
 The elasticity of demand for a given good or service is
calculated by dividing the percentage change in
quantity demanded by the percentage change in price. If
the elasticity quotient is greater than or equal to one, the
demand is considered to be elastic. While the price of a
good or service is the most common economic factor
used to measure the elasticity of demand, there are other
measures of the elasticity of demand, including income
elasticity of demand and substitute elasticity of demand.
Examples
 For example, a change in the price of a luxury
car can cause a change in the quantity
demanded. If a luxury car producer has a
surplus of cars, they may reduce their price in
an attempt to increase demand. The extent of
the price change will determine whether or
not the demand for the good changes and if
so, by how much.
Inelasticity of Demand

 An inelastic product, on the other hand, is

defined as one where a change in price does
not significantly impact demand for that
product.
 Inelastic products are necessities and,

usually, do not have substitutes they can

easily be replaced with.
Examples
 For businesses, there are many advantages to
price inelasticity. For example, they have
greater flexibility with prices because demand
remains basically the same, even if prices
increase or decrease. If the business raises its
prices up or down, consumers' buying habits
will remain mostly unchanged. This can
impact demand and total revenue for a
business in a couple of different ways.
Elasticity of Supply
 Elasticity of supply measures the degree of
responsiveness of quantity supplied to a
change in own price of the commodity. It is
also defined as the percentage change in
quantity supplied divided by percentage
change in price.
Types of Elasticity of Supply

 (a) Elastic Supply (ES>1):

Supply is said to be elastic when a given percentage
change in price leads to a larger change in quantity
supplied. Under this situation, the numerical value
of Es will be greater than one but less than infinity.
 (b) Inelastic Supply (ES< 1):
Supply is said to be inelastic when a given
percentage change in price causes a smaller change
in quantity supplied. Here the numerical value of
elasticity of supply is greater than zero but less than
one.
Types of Elasticity of Supply

 (c) Unit Elasticity of Supply (ES = 1):

If price and quantity supplied change by the same
magnitude, then we have unit elasticity of supply.
 (d) Perfectly Elastic Supply (E = ∞):
S

The numerical value of elasticity of supply, in

exceptional cases, may reach up to infinity. Here
the supply curve has been drawn parallel to the
horizontal axis. The economic inter­pretation of this
supply curve is that an unlimited quantity will be
offered for sale at the price OS. If price slightly
drops down below OS, nothing will be supplied.
Types of Elasticity of Supply

 (e) Perfectly Inelastic Supply (ES = 0):

This curve describes that whatever the price of
the commodity, it may even be zero, quantity
supplied remains unchanged at OQ. This sort of
supply curve is conceived when we consider the
supply curve of land from the viewpoint of a
country, or the world as a whole.
Economies and Diseconomies of
Scale
 Economies of scale are when the cost per unit
of production decreases because the output
increases
 Diseconomies of scale are when the cost per

unit of production increases because the

output increases
Types/Reasons of Diseconomies of
Scale
 Technical Diseconomies of Scale
 Organizational Diseconomies of Scale
 External Diseconomies of Scale