The concept of elasticity
- 2. What is Elasticity? The measure of the sensitivity or responsiveness of quantity demanded or quantity supplied to changes in prices. Can be measured in numerical terms where E stands for Elasticity. E= percentage change in quality percentage change in price
- 4. NUMERICAL VERBAL DESCRIPTION TERMINOLOGY MEASURE OF ELASTICITY Zero Quantity Perfectly demanded/supplied does Inelastic not change as price changes Greater Quantity Inelastic than zero demanded/supplied but less changes by a similar than one percentage than price does One Quantity Unit demanded/supplied Elasticity changes by exactly the same percentage as price does
- 5. Greater Quantity Elastic than one demanded/supplied but less changes by a larger than percentage than price infinity does Infinity Purchasers are Perfectly prepared to buy all (infinitel they can obtain at y) Elastic some price and none at all at even slightly higher price; producers are willing to sell all they can at some price and none at even slightly lower price.
- 6. Elasticity of Demand “indicates the extent to which changes in price (or other factors) cause in the quantity demanded.” Can be classified as follows: 1. Price Elasticity 2. Income Elasticity 3. Cross Elasticity of Demand
- 7. 1. Price Elasticity of Demand Used to determine the responsiveness of demand to changes in price of the commodity. EP= QD2- QD1/QD1 P2- P1/P1
- 8. 2. Income Elasticity Of Demand Refers to the determination of the responsiveness of demand to a change in consumer income. Ey= QD2- QD1/QD1 y2- y1/y1
- 9. 3.Cross Elasticity of Demand Refers to the responsiveness of the quality demanded of a particular good to changes in the price of another good. Ec= QA2- QA1/QA1 PB2- PB1/PB1
- 10. Determinants of Demand Elasticity The price of the good in relation to the consumer’s budget The availability of substitutes Type of good The time under consideration
- 11. Elasticity of Supply Refers to the responsiveness of the sellers to the change in price. Es= QS2- QS1/QS1 P2- P1/P1
- 12. Determinants of Supply Elasticity The feasibility and cost of storage The ability of producers to respond to price changes time