Lesson 4

Elasticity Of Supply and Demand

Market Structure
 Concept of Price Elasticity
Elasticity is the percentage change in one thing relative to a percentage change in
Another.
The price elasticity of supply measures how responsive the market it is to price
changes.
The price elasticity of demand measures how responsive demand is to price
changes.
Price Elasticity Demand
(formula)
 Elastic Demand
 Price Elasticity more than 1
 Changes of Qty more than changes of Price
 Inelastic Demand
 Price Elasticity Less than 1
 Changes of Qty Less than changes of Price
 Perfectly Elastic Demand
 Demand Curve is horizontal
 Changes of price = Changes of Qty Demand
 Perfect Competition
 Perfectly Inelastic Demand
• Demand Curve is vertical
• Changes of price ≠ Changes of Qty Demand
• Eg Monopoly Market
Effect of Substitute Product on
Elasticity
Greater availability of substitute, closer the substitute, greater price elasticity demand
The demand for a good is elastic if a substitute for it is easy to find.
The demand for a good is inelastic if a substitute for it is hard to find.
The ease with which consumers can substitute another good.
Example
Consumers can readily substitute one brand of detergent for another if the price rises
So, we expect demand to be elastic
 What makes Demand
elastic?
More Elastic Less Elastic

• Diverse preferences –people like to eat many • Rigid preferences – people eat predomiant
different kinds of foods like cassava rice • Limited or no close substitute commodities
• Availability of close substitute commodities are available for final consumption –
for final consumption – maize is scarce but • The commodity is a necessity
millet, sorghum and rice are plentiful • Lower incomes
• Availability of close substitutes for derived
demand
• The commodity is NOT a necessity
• Higher incomes
• Luxury commodities
 4. Price Elasticity of Supply

Supply Elasticity=
 Inelastic Supply
Elasticity less than 1
the % change in the quantity supplied < the
percentage change in price.
 Perfectly Inelastic Supply
 Elasticity equal 0
 if the % change in the quantity supplied = 0
when the price changes.
 What makes Supply Elastic?
More Elastic Less Elastic

• Many close substitutes • Few close substitutes

• Significant competition among sellers
• More continuously produced – more of the
commodity can be brought onto the
• Available stocks
• Limited market barriers – few formal or informal
fees and legal restrictions, etc
• Good market infrastructure – good roads,
telecommunications, etc
• Expectations that prices will be decreasing
• Adjustment period is longer – e.g. several months as
opposed to a few days or a week
• Lack of competition among sellers
• Produced (harvested) infrequently
• Limited or no stocks
• Market barriers – formal and informal fees or
restrictions, etc
• Poor market infrastructure – poor roads,
telecommunications, etc
• Expectations that prices will beincreasing
(speculation)
• Short period of adjustment