Categories
Economics

Elasticity of Demand

Elasticity of demand can be defined as the degree of responsiveness of quantity demanded to little changes in the price of a commodity, or to change in the income or taste of the consumer, or to change in the prices of other commodities.

Price Elasticity of Demand

Price elasticity of demand refers to the degree of responsiveness of demand to little changes in prices of goods and services.

Types of Price Elasticity

  1. Elastic demand: Demand is elastic if a little change in price brings about a greater change in the quantity of a commodity demanded.
    demand

    Elastic or fairly Elastic Demand curve.
  2. Inelastic Demand: Demand is inelastic if a larger change in price of commodities leads to little or no change in the quantity demanded.
    demand 2
  3. Unity or Unitary Elasticity of Demand: Demand is unitary if a change in price leads to an equal change in the quantity of goods demanded
    demand4
  4. Perfectly Elastic Demand: In this curve any slight increase in price will make consumers stop buying the commodity at all, while a slight decrease in price will make the consumers purchase all the quantity of that commodity available.
    demand5
  5. Perfectly Inelastic Demand: Demand is said to be perfectly inelastic of a change in price has no effect on the quantity of goods demanded.
    demand6

Measurement of elasticity of Demand

Elasticity of demand can be measured or determined by calculating the elasticity of demand co-efficient. The formula used in calculating the elasticity of demand is;
Co-efficient of price elasticity of demand =(percentage change in Quantity Demanded)/(Percentage change in price)

Note:

If the co-efficient is more than 1, demand is elastic

If the co-efficient is less than 1, demand is inelastic

If the co-efficient is 1, elasticity of demand is unitary.

Example:

Given the figure below;

Price of commodity A in January = N5.00

Price of commodity A in February = N7. 00

Quantity of A bought in January = 20kg

Quantity of A bought in February = 16kg

  1. Calculate
  2. Percentage change in quantity bought (%)
  3. Co-efficient of price elasticity of demand
  4. From your answer, is the demand elastic or inelastic.
  5. How do you know this?

Commodity A

MonthPriceQuantity demanded
January5.0020kg
February7.0016kg
demand q

Question

Given the following information; price of bread in November = N10

Price of bread in December = N14

Quantity bought in November N40

Quantity bought in December = N36

  1. Calculate percentage change in price
  2. Calculate percentage on quantity bought
  3. Calculate the co-efficient of price elasticity of demand.
  4. What type of demand elasticity is this?
  5. How did you know this?

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