1. ELASTICITY OF DEMAND & SUPPLY

2. Learning Objectives At the end of the session, participants
should be able to:
Knowledge
Define price elasticity of demand.
Define price elasticity of supply.
Define income elasticity.

3. Learning Objectives Performance Calculate elasticity values Attitude
Appreciate the importance of the elasticity concepts.

4. Previous Knowledge Required previous knowledge: Demand and supply
Law of demand
Law of supply

5. Price Elasticity of DD
The degree of responsiveness of quantity demanded of a commodity to the change in price is called elasticity of demand. Elasticity of demand expresses the magnitude of change in quantity of a commodity.

6. Types of elasticity Five cases of Elasticity of Demand: Elastic demand
Inelastic demand
Perfectly elastic demand
Perfectly inelastic demand
Unitary elastic demand

7. Elastic demand
% change in price causes a greater % change in quantity demanded. If price changes by 10% the quantity demanded of the commodity change by more than 10% i.e. 25%.

8. Inelastic demand
% change in price causes less % change in quantity demanded. If price falls by 20% quantity demanded rises by less than 20%.

9. Unitary demand
% change in price causes an equal % change in quantity demanded. If the price falls by 25% the quantity demanded rises by the same 25%. Numerically elasticity of demand is said to be equal to 1.(ed = 1).

10. Perfectly elastic A very insignificant change in price leads to
an infinite change in quantity demanded. A
very small fall in price causes demand to
rise infinitely. Similarly, a very insignificant
rise in price reduces the demand to zero.

11. Perfectly inelastic
A change in price produces no change in the quantity demanded of a commodity. Thus the amount demanded will be totally unresponsive of change in price. Therefore, elasticity of demand is said to be zero.

12. The determinants of Ed Substitution effect
Demand is more elastic for a good with
close substitutes. When consumers have
limited alternatives, the demand for a good
is more price inelastic.

13. The determinants contd.
Income effect
If the share of budget spent on a good is
very small, the demand for the good will be
inelastic.

14. The determinants contd.
Luxury Vs Necessity:
Necessity's demand is usually inelastic
because there are usually very few
substitutes for necessities. Luxury product,
such as leisure sail boats, are not needed in
a daily bases. There are usually many
substitutes for these products. So their
demand is more elastic.

15. The determinants contd.
Time lag effect:
The longer the time after the price change,
the more elastic will be the demand. It is
because consumers are given more time to
find more substitutes.

16. Elasticity of Supply Price elasticity of supply measures how
responsive producers are to a change in
the price of good. It is defined as a
measure of the responsiveness of quantity
supplied to change in price.

17. Types of elasticity of sup
Elastic supply
Inelastic supply
Perfectly elastic supply
Perfectly inelastic supply
Unitary elastic supply

18. Determinants of Es Availability of materials:
The limited availability of raw materials
could limit the amount of a product that
can be produced.

19. Determinants of Es cont.
Length and complexity of product:
If the product is complex to manufacture, it
becomes more inelastic.
Time to respond:
If the producer has more time to respond
to price changes, the product is more
elastic.

20. Determinants of Es cont.
Excess capacity:
A producer with unused capacity will
quickly respond to price changes
Inventories :
A producer with a large number of products
can quickly increase the amount of supply it
delivers to the market.

21. Determinants of Es cont.
The number of substitutes:
This determines how easily one person
could switch from one product to another
and determines how elastic or inelastic a
good is.

22. Income elasticity This measures the percentage change in the
quantity demanded of a good to a given
percentage change in income.

23. Income Elasticity contd.
Inferior Goods
Goods with an income elasticity less than
one are called inferior goods. Demand for
such goods decreases as income increases.

24. Income Elasticity contd.
Normal Goods
Goods with income elasticity greater
than zero are called normal goods.
Demand for such goods increases as
income increases

25. Income Elasticity contd.
Normal goods with an income elasticity less
than one are income inelastic. Necessities
such as food, housing, and clothing are good
examples.

26. Income Elasticity Goods with income elasticity greater than
one are income elastic. Luxuries such as
fine cars, vintage wine, and meals at fancy
restaurants are examples.

27. Cross Price Elasticity
This measures the responsiveness of the demand
for one good to changes in the price of another
good. It is the percentage change in the demand of
one good (holding the price constant) divided by
the percentage change in the price of another
good.

28. Cross Price Elasticity contd.
The numerical value can be positive,
negative, or zero depending n whether the
two goods are substitutes, complements, or
unrelated.

29. Cross Price Elasticity contd.
Substitutes
If an increase in the price of one good leads to an
increase in the demand for another good, the
value of their cross price elasticity is positive
and the goods are substitutes.

30. Cross Price Elasticity contd.
Complements
If an increase in the price of one good leads to an
decrease in the demand for another good, the
value of their cross price elasticity is negative
and the goods are complements.

31. Cross Price Elasticity
Independent Goods
Independent goods have a cross-price
elasticity of zero: as the price of one good
increases, the demand for the second good
is unchanged.

32. Recap Questions Define price elasticity of demand.
Define price elasticity of supply.
Define income elasticity.
Explain the importance of elasticity concepts.