GRADE 11 ECONOMICS

Chapter 3:Elasticity of Demand and Supply

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1. Elasticity of Demand

Elasticity of demand measures how much the quantity demanded of a commodity changes in response to changes in its determinants (price, income, or price of related goods).

Types of Elasticity of Demand
  • Price Elasticity of Demand
  • Income Elasticity of Demand
  • Cross Elasticity of Demand

A. Price Elasticity of Demand (Ep)

It shows the responsiveness of demand to a change in the price of a commodity.

Ep = (∆Q/∆P) × (P/Q)
where,
Ep = Coefficient of price elasticity of demand
Q = Initial quantity demanded
∆Q = Change in Quantity demanded
∆P = Change in Price
P = Initial Price
Types of Price Elasticity:
Perfectly Elastic Demand (Ep = ∞)

Demand changes infinitely even with a slight change in price.

[Horizontal Demand Curve]
Perfectly Inelastic Demand (Ep = 0)

Demand remains constant despite price change.

[Vertical Demand Curve]
Unitary Elastic Demand (Ep = 1)

% change in demand equals % change in price.

[Rectangular Hyperbola Curve]
Relatively Elastic Demand (Ep > 1)

Demand changes more than price.

[Flatter Demand Curve]
Relatively Inelastic Demand (Ep < 1)

Demand changes less than price.

[Steeper Demand Curve]

B. Income Elasticity of Demand (EY)

It measures the responsiveness of demand to a change in the income of the consumer.

EY = (∆Q/∆Y) × (Y/Q)
where,
EY = Coefficient of income elasticity of demand
Q = Initial quantity demanded
∆Q = Change in Quantity demanded
∆Y = Change in Income
Y = Initial Income
Types of Income Elasticity:
Positive (EY > 0)

Demand rises with income.

Greater than unity (EY > 1)

The percentage increase in demand is more than percentage increase in income and vice versa.

For Ex. Luxury goods

[Steep Positive Slope]
Less than unity (EY < 1)

The percentage increase in demand is less than percentage increase in income and vice versa.

For Ex. Necessities

[Gentle Positive Slope]
Equal to unity (EY = 1)

The percentage increase in demand is equal to percentage increase in income and vice versa.

For Ex. Normal goods

[45° Line]
Zero (EY = 0)

Demand unaffected by income.

For Ex. Salt

[Vertical Line]
Negative (EY < 0)

Demand falls as income rises (inferior goods).

[Downward Slope]

C. Cross Elasticity of Demand (EXY)

It shows how the demand for one good (X) responds to the price change of another good (Y).

EXY = (∆QX/∆PY) × (PY/QX)
where,
EXY = Coefficient of Cross elasticity of demand
∆QX = Change in the demand for commodity-X
∆PY = Change in price of commodity-Y
PY = Price of commodity-Y
QX = Quantity of commodity-X
Types of Cross Elasticity:
Positive (EXY > 0)

Substitute goods (tea and coffee)

[Upward Slope]
Negative (EXY < 0)

Complementary goods (car and petrol)

[Downward Slope]
Zero (EXY = 0)

Unrelated goods

[Horizontal Line]

Determinants of Elasticity of Demand

  • Nature of the commodity
  • Availability of substitutes
  • Number of uses
  • Income level of consumers
  • Joint demand
  • Postponement of consumption
  • Habits
  • Price level
  • Time period

2. Elasticity of Supply

Elasticity of supply measures how much the quantity supplied of a commodity changes with a change in its price.

ES = (∆Q/∆P) × (P/Q)
where,
ES = Coefficient of elasticity of supply or price elasticity of supply
P = Initial price
Q = Initial quantity supplied
∆Q = Change in Quantity Supplied
∆P = Change in price

Types of Elasticity of Supply:

Perfectly Elastic (ES = ∞)

If negligible change in the price results in the infinite or unlimited change in the quantity supplied.

[Horizontal Supply Curve]
Perfectly Inelastic (ES = 0)

If there is no change in the quantity supplied despite the change in the price of the commodity.

[Vertical Supply Curve]
Unitary Elastic (ES = 1)

If the percentage change in quantity supplied is equal to the percentage change in the price of the commodity.

[45° Supply Curve]
Relatively Elastic (ES > 1)

If the percentage change in the quantity supplied of a commodity is more than the percentage change in the price of the commodity.

[Flatter Supply Curve]
Relatively Inelastic (ES < 1)

If the percentage change in the quantity supplied of a commodity is less than the percentage change in the price of the commodity.

[Steeper Supply Curve]
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