MAKERERE UNIVERSITY

COLLEGE OF HUMANITIES AND SOCIAL SCIENCES

SCHOOL OF LIBERIAL AND PERFORMING ARTS

DEPARTMENT OF DEVELOPMENT STUDIES

NAME: AINEMBABAZI PRECIOUS.

REGSTRATION NUMBER: 19/U/16055/EVE

ELASTICITY
Elasticity refers to the responsiveness to change of either quantity demanded or supplied.

Types of elasticity
 Elasticity of demand
 Elasticity of supply

Elasticity of demand refers to the percentage responsiveness of the quantity demanded of a

commodity due to change in other factors affecting demand. such as price income of the
consumer. Price related commodities etc.

There are three types of elasticity of demand;

 Price elasticity
 Income elasticity
 Cross elasticity
Price elasticity of demand is the degree responsiveness of quantity demanded due to
change in its own price i.e;
it’s the percentage change in the price of the good. That is;

ep = percentage change in quantity demanded/percentage change in price of the commodity

Δq Δp
ep = ×100 ÷ ×100
q p

Δq Δ p
e.p = ÷
q p

Since the normal demand curve is drawn sloping down, then its negative due to the negative
relationship between price and quantity which means the price elasticity of demand formula
should be negative sign.

Δq p
E.p =−[ × ]
Δp p

Price elasticity of demand ranges from zero . I.e;

0 ≤ ep ≤ ∞

When ep=0 , then it is perfectly inelastic.

When 0< ep<1, inelastic/elastic is low

When ep =1,unity elastic/unitary

When 1<ep< ∞,elastic/elasticity is high.

When ep =∞perfectly elastic

POINT ELASTICITY
This measures the price elasticity of demand at a point on the demand curve.it measures the
small percentage changes in price .

It is given by the formula;

dq p
E.p = (-) ×
dp q

ARC ELASTICITY
This refers to the price elasticity of demand between two points on demand curve. it is given
by the formula;

Δq p1÷ p2
E.p=(-) ×( )
Δp q1÷q2

This there for means arc elasticity is simply the average elasticity of the point of elasticity at the
two points.

GROSS ELASTICITY.
This refers to the responsiveness of the demanded of a commodity due to a given change in
the price of another good. for example lets label pods as X and Y

E Percentage change∈ quantity of good Y

XY =¿ ¿
Percentagechange ∈ price of good X

It takes on three visible values that is negative, zero or positive.

 When cross elasticity is negative ;

This implies that an increase in price of commodity X leads to a fall in the quantity of
good Y and vice versa.
From the law of demand ,increase in the price of a good leads to a fall in the quantity
demanded of good Y.
 This means that goods X and Y will be consumed at the same time.
 When cross elasticity is positive;
This implies that an increase in price if a commodity x leads to an increase in quantity
demanded of another good y and clearly by the law of demand as price of a good x
increases less than that of y it is demanded .
This implies that goods x and y are substitutes.
 When cross elasticity is zero
This means that change in the price of a god x does not affect the quantity demanded of
another good y.
In this case therefore commodities x and y are said to be unrelated

Therefore to summarise cross elasticity

 Negative =x and y are complements
 Zero =x and y are not related
 Positive = x and y are substitutes

INCOME ELASTICITY OF DEMAND.

This refers to the percentage change in the quantity demanded of a commodity
divided by the percentage change in the consumers income.
dq
q dq y
e y= ×100 or e y = ×
dy dy q
y

Where ;
 Ey=income elasticity of demand
 Y=income of the consumer
 Q=quantity demanded
 dy=change in consumers income
 when income elasticity of demand is negative ;
This implies that consumers income leads to quantity demanded of the
commodity with negative elasticity of demand as inferior good.
 When income elasticity demand is zero
This means that change in consumers income does not change the quantity
demand of a commodity .
This therefore means that such a good is a necessity.
 When income elasticity of demand is positive .
This implies that increase in consumers income leads to an increase in the
quantity demanded of a commodity similarly a fall in the quantity demanded of
a commodity
 Which therefore means that such a good is normal.
 Negative =normal
 Zero =necessity good
 Positive =normal good

Factors Affecting the Price Elasticity of Demand

 Nature of a commodity: If you regard a product as a necessity, then your demand for it will be
inelastic: you’re willing to pay any reasonable price. A change in price of the neccesities may
have a small impact on their quantity demanded e.g. gasoline If you think it’s a luxury, then
your demand is very elastic and it may drop considerably due to an increase in price, e.g. IPL
ticket, car.
 Availability of substitutes: The more possible substitutes, the greater the elasticity. Example.
Coke and Pepsi. If the price of coke goes up, people will be tempted to buy Pepsi. The demand
of coke will therefore fall. In case of salt, it has no close substitute and is necessary. its demand
is inelastic.
 Proportion of Total expenditure spent: Products that consume a small portion of the consumer’s
income its demand is inelastic, because a change in its price does not make a much difference in
the budget of the consumer Example, a consumer spends a very small proportion of income on
purchase of match boxes. Therefore, even large change in its price will not induce him to
change his level of demand. the other hand the demand for the products on which the
consumer spends a large fraction of their income , a change in their price will have a
considerable effect on the budget and therefore its demand will be elastic
 Time period: Elasticity tends to be greater over the long run because consumers have more time
to adjust their behavior and vice-versa.
 Number of uses: The greater the number of uses of a commodity, the higher is the price
elasticity of demand. Example. milk can be used to make cheese, butter, curd etc. If its price
rises, it will be put to only important uses like serving the children or for the sick members in the
family.
 Possibility of postponement: If the demand for a particular commodity cannot be postponed its
demand will be inelastic, Example medicines, food etc. and vice –versa.

REFERENCES.

1.www.jnc.inc