Elasticity

Section 1: Understanding Elasticity

• Elasticity refers to the responsiveness of demand or supply to changes in price or income.
• Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.
• It’s calculated as the percentage change in quantity demanded divided by the percentage change in price.
• Price elasticity of supply (PES) measures how sensitive the quantity supplied is to a change in price.

Section 2: Elastic, Inelastic, and Unit Elasticity

• When the PED or PES is greater than 1, it is considered to have elastic demand or supply. This means changes in price lead to proportionally larger changes in quantity demanded or supplied.
• When the PED or PES is less than 1, it is said to have inelastic demand or supply resulting in quantity demanded or supplied being less responsive to price changes.
• If PED or PES equals 1, demand or supply is said to be unit elastic - a change in price brings about the same percentage change in quantity demanded or supplied.

Section 3: Factors Influencing Elasticity

• Availability of substitutes: Goods with close substitutes usually have more elastic demand or supply.
• Degree of necessity: Goods or services regarded as necessities tend to have more inelastic demand.
• Proportion of income spent on the good: If a good takes up a large proportion of a consumer’s income, then the demand is likely to be elastic.
• Time period: In the long run, both demand and supply tend to be more elastic.

Section 4: Importance of Elasticity

• Understanding elasticity helps firms make important decisions regarding pricing strategy and revenue.
• It helps government and policymakers predict effects of taxation and understand how it can affect total revenue.
• Elasticity also informs understanding about consumer behaviour and responses to price changes.