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economics

DEFINITION OF ELASTICITY OF DEMAND

Elasticity of demand may be defined as the degree of responsiveness of demand as changes in price, income, prices of other commodities etc.

 

Types of Elasticity of Demand

  1. Price elasticity of demand
  2. Income elasticity of demand
  3. Cross elasticity of demand

 

EVALUATION

  1. Define Elasticity.
  2. State three types of Elasticity of demand.

 

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is the degree of responsiveness of demand for a particular commodity to changes in its price.  It is the rate at which the quantity demanded changes as its price changes.

To measure price elasticity of demand we use the formula:

   % change in Quantity Demanded

% change in price

This formula can be broken down or simplified as:

 

Old Quantity – New Quantity  X  100

Old quantity

E=       Old Price – New Price   X 100

Old Price

 

Illustration

When the price of a given product is reduced from N90 to N80, the quantity demanded increases from 50 to 60 units.   Deduce the co-efficient of elasticity of demand.

Solution

Old price = N90, New price = N80

Change in price = 80 – 90 = -10

=    10   x  100     

90         1               =   11.1%

Old quantity = 50, New quantity = 60

Change in quantity = 60 – 50 = 10

=  10  x  100

50         1     =  20%

PE      =      20

11.1    =   1.8%

 

TYPES OF PRICE ELASTICITY OF DEMAND

The types of elasticity of demand and their graphical representation can be shown as follows:

  1. Perfectly Elastic (or Infinitely Elastic) Demand.

Consumers react sharply to changes in price. They are willing to buy all the goods available at a particular price and none at all at a slightly higher price. The co-efficient of elasticity tends to infinity.

 

2. Perfectly Inelastic (or Zero Elasticity) Demand

When the quantity demanded remains the same regardless of the change in price. The demand is said to be perfectly inelastic. The co-efficient of elasticity is zero

 

  1. Unitary (or Unity) Elasticity of Demand

This is the situation where a change in price or income brings about the same percentage change in the quantity demanded. The co-efficient of elasticity of demand is equal to 1

Price

 

  1. Fairly Elastic Demand

In this case a small percentage change in price gives rise to more than proportionate change in the quantity demanded.  For example where a 20% fall in price leads to 50% rise in demand, the co-efficient of elasticity is greater than 1 but less than infinity.

  1. Inelastic Demand (Fairly Inelastic Demand)

When a change in price of a commodity leads to a less than proportionate change in the quantity demanded then demand is inelastic e g a 15% increase in price bringing about 10% decrease in quantity demanded.

The co-efficient of elasticity is less than 1 but greater than zero

 

FACTORS AFFECTING (OR DETERMINING) ELASTICITY OF DEMAND

  1. Availability of Close Substitutes: A commodity that has close substitutes is likely to have an elastic demand
  2. Degree of Necessity of the Goods: If a commodity is a necessity or a near-necessity, increase or

decrease of its price are not likely to affect its demand

  1. Proportion of Consumer’s Income that Is Spent on that Commodity: Generally the higher a persons income, the more inelastic his demand for commodities
  2. Habit: If a consumer has become addicted to a commodity, his demand for the good will tend to be monastic. An increase in the price of the commodity may therefore not affect (reduce) his quantity demanded.
  3. The Level of Consumer’s Income: The larger the income of the consumer the more inelastic is his demand for commodities. On the other hand, the demand of consumers with low income tends to be elastic.
  4. Cheap Commodities: The cost of some commodities are relatively insignificant and as such consumers demand for them will be inelastic.

 

EVALUATION

  1. Define price elasticity of demand.
  2. The figure below was-extracted from the demand schedule of Kingsley Nanta, a consumer of bread.

Price in naira                 Quantity Demanded

 

Old         New                Old                   New

50         70                  200                  160

 

You are required to calculate:

  1. Percentage change in quantity demanded
  2. Percentage change in price
  3. Co-efficient of price elasticity of demand
  4. From your answer in i-iii above state whether demand is elastic or inelastic.
  5. Explain your answer in (c) above.
  6. With the aid of sketch diagrams explain the following types of elasticity demand (a) Unity (b) Inelastic (c) Elastic (d) Zero (e) Infinitely.

 

GENERAL EVALUATION QUESTIONS

  1. What is abnormal demand?
  2. High the importance of opportunity cost to the government.
  3. Explain three differences between public corporation and public limited liability company.
  4. Distinguish between peasant farming and commercial farming.
  5. Why is scarcity a fundamental problem in Economics?

 

WEEKEND ASSIGNMENT

  1. If elasticity of supply is greater than 1 supply is (a) Unitary elastic (B) Inelastic (c) Elastic (d) Infinitely elastic
  2. When the demand curve is a straight line parallel to x axis, demand is (a) fairly elastic (b) fairly inelastic(c) Perfectly elastic (d) Perfectly inelastic
  3. If elasticity of demand for a commodity is less than 1, demand is (a) Unitary elastic (b) Inelastic (c) Infinitely elastic (d) Zero elastic
  4. If the price of a commodity rises from N2 o N4 and its demand decrease from 125 to 100 then the co-efficient of elastic of demand is (a) 0.02 (b) 0.20 (c) 0.25 (d) 5
  5. For a good having close substitutes the price elasticity of demand is likely to be (a) Zero (b) negative (c) more than (d) less than

 

SECTION B

  1. Define elasticity of demand.
  2. State three factors that determine the elasticity of demand for goods.

 

See also

DEMAND AND SUPPLY

THEORY OF CONSUMER BEHAVIOUR

MEASURES OF DISPERSION

MEASURES OF CENTRAL TENDENCY

DEFICIT BALANCE OF PAYMENT

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