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ELASTICITY OF DEMAND

Meaning of elasticity of demand measures the degree of responsiveness of quantity of commodity bought to changes in the prices of a commodity. It can also be defined as the responsiveness of one variable to changes in another variable. There are different types of elasticity of demand which are price, income and cross elasticity. Price elasticity of demand can be defined as the degree of responsiveness of the quantity demand of a commodity to a change in its price Income elasticity of demand is the responsiveness of the quantity demanded of one commodity to change in consumers income Cross elasticity of demand is the responsiveness of the quantity of one commodity to a change in the price of another commodity MEASURESMENT OF ELASICITY OF DEMAND Elasticity of demand can be can be determined by calculating the elasticity of demand co-efficient. PRICE ELASCITY OF DEMAND: It is the proportionate change in the demanded divided the prop ornate change in price. FORMULAE ED=

EXAMPLE: If the price of a commodity increases from N15 to N20 and the quantity bought increases from 150kg to 200kg, determine the price elasticity of demand. Step 1: change in quantity bought N200-NI50= N50 Step 2: in quantity bought=50 150 1 100= 33

Step 3: change in price= 20-15 = N5.00 Step 4: change in price=5 15 100= 33 1

ELASTICITY= 33 =1

INCOME ELASTICITY OF DEMAND: Income elasticity of demand of demand; it is the proportionate change in the quantity demanded divided by the proportionate change in income. FORMULAE ED= %C CHANGE IN QUATITY DEMANDED %CHANGE IN INCOME EXAMPLE 2; A in consumers income from N250 to N400 brings about an increase in the quatity demanded of a commodity from 1000kg to 3000kg, than the income elasiticity of demanded Step 1; change in income N400-N250 =N150 Step 2. % in income = STEP 3. Change in quatity bought =3000kg 1000kg =2000kg Step 4. Change in quatity = Step 5. Ey = CROSS ELASTICITY OF DEMAND: It is use to measure the prpportionate the change in quatity demanded (say X) divided by the proportionate change in the price of another commodity ( say y) Fornulea Co-effiencient of cost elasticity of demand (Exy) = Example 3;

An increase in the price of Y from N100 to N 150 result in an increase in the quatity demanded of X form 250kg to 400kg, then cost elasticity of demand. Step 1: change in the price of Y = 150 100 = N50 Step 2: % change in price = Step 3. change in quantity of X = 400 250 = 150 Step 4: % change in quatity of X = Step 5: Exy = The co-effiecient is more than one therefore, it is elastic demand.

1. ELASTIC DEMAND: The proportionate change in the quantity demanded is greater than the proportionate change in price. The numerical value of elasticity is greater than one but less than infinity. ED > 1.

D D PRICE EEE

D QUANTITY 2. INELASTIC DEMAND: The proportionate change in quantity demanded is less than the proportionate change in price. The numerical value of the elasticity is less than one but greater than zero. ED < 1

D PRICE

D QUANTITY 3. UNITARY ELASTIC DEMAND: The proportionate value of the elasticity is one. The proportionate change in the quantity demanded is equal to the proportionate change in price. ED 1 D PRICE D

QUANTITY

4. PERFECTLY ELASTIC DEMAND/INFINITELY ELASTIC: The numerical value of elasticity is infinity. This is a situation where consumers are ready to buy all they can get of a commodity at a given price while very increase in this price may cause the quantity demanded to fall to zero. ED

PRICE

Quantity 5. PERFECTLY INELASTIC DEMAND/ZERO ELASTIC: The quantity demanded remains the same irrespective of any change (rise or fall) in price. ED 0 PRICE

D QUANTITY TYPES OF INCOME ELASTICITY OF DEMAND ELASTIC DEMAND: Demand increases by a greater percentage than does income. In this case, elasticity is greater than 1, but less than infinity. INELASTIC DEMAND: percentage change in quantity demanded is greater than percentage change in income, but by a smaller proportion. For this range of goods, ED is greater than 1. NEGATIVE INCOME ELASTICITY OF DEMAND: This is the case for those goods for which the consumers reduce their income rises (they are also called inferior goods).

UNIT INCOME ELASTICITY: Increase in income give rise to exactly the same percentage increase in quantity demanded. The income elasticity of demand coefficient ED is equal to 0 PERFECT INELASITIC DEMAND: The income elasticity of demand is Zero if with a change in income quantity demanded remain unchanged. ED=

We can summary the possible values of income elasticity of demand coefficient as follows: If 1<ED < , demand in income elastic

If 0 <ED< 1, demand is income inelastic If ED < = 0, negative income elasticity If ED = 1, unit income elasticity If ED = 0, demand is perfectly income inelastic.

TYPES OF CROSS ELASTICITY OF DEMAND HIGH CROSS ELASTICITY OF DEMAND: A given percentage increase (fall) in Price of a commodity leads to greater percentage increase or fall in the demand for another commodity. In this case, ED is greater than one but less than infinity. LOW CROSS ELASTICITY OF DEMAND: A given percentage increase (fall) in the price of another commodity leads to a less percentage increase or fall in the demand for another commodity. The elasticity is greater than zero but less than one. UNIT CROSS ELASTICITY OF DEMAND: A given percentage increase or fall in price of a commodity leads to exactly the same percentage increase or fall in the demand for another commodity. The elasticity is equal to one. NEGATIVE CROSS ELASTICITY: A rise or fall in the price of commodity leads to a fall or rise in the demand of another commodity. The elasticity is less than zero. INFINITE CROSS ELASTICITY: A fall in the price of a commodity reduces demand for another commodity to nothing. The elasticity is said to be infinity. ZERO CROSS ELASTICITY: For two goods that are not in any way related, the cross elasticity of demand between them will be equal to zero. FACTORS AFECTING PRICE ELASTICITY OF DEMAND

STRENGE OF TASTE/HABIT: The extent to which a consumer has become addicted to a commodity determines the elasticity of demand. If one has formed the habit of consuming a commodity, demand tends to be inelastic. THE LEVEL OF INCOME: the higher the income of the consumer, the more elastic demand for the commodity. Consumer with a lower income is more responsive to price changes. AVAILABILITY OF CLOSE SUBSTITUTE: Commodities with close substitute have an elastic demand while a commodity without close substitute has inelastic demand. DEGREE OF NECESSITY: Necessary goods have elastic demand because consumers will not decrease the quantity bought whether the price is increasing or decreasing. People react more sharply to changes in prices of luxury goods e.g. television THE PROPORTION OR PERCENTAGE OF TOTAL INCOME SPENT ON THE COMMODITED: The smaller the proportion of total income spent on a commodity the more inelastic the demand. However, expensive goods income, tend to have a large percentage of a consumers total income, tend to have an elastic demand. THE TIME FACTOR: the longer the time taking to find substitutes or to change spending habits, the more inelastic the demand, but if it takes a shorter time e to find substitute or to change spending habits demand will more elastic.

Let us recall our table and use it to calculate our elasticity. price Quantity demanded 30 12 24 18 20 25 15 34 12 49 10 60

REFERENCES H.I. AGANMUYI- APPROACH TO ECONOMIC. GILBERT J. ADOGHOR,OKECHUKU ONUCHUKU,DENNIS B. EWUBAREPRINCIPLES OF ECONOMIC. EWA UDU,G.A AGU- NEW SYSTEM ECONOMIC.

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AN ASSIGNMENT ON ECO 1111: PRICIPLES OF ECONOMICS

PRESENTED TO DENNIS B. EWUBARE (LECTURER) DEPARTMENT OF SOCIAL SCIENCES & MANAGMENT VERITAS UNIVERSITY ABUJA (THE CATHOLIC UNIVERSITY OF NIGERIA) OBEHIE CAMPUS

BY CHRIS-WORLU IGWUGWUM- VUG/POL/11/323 ORIAKU MICHEAL-VUG/ACC/11/339 ABIAGOM JOHN CHUKWUKA-VUG/POL/11/354

15/FEB/2012