QUESTION 06.

Elasticity, a measure of the responsiveness of quantity demanded or quantity supplied to

one of its determinant.
Price elasticity of demand, is the measure on how much quantity demanded of good
responds to the change in the price of that good, computed as the percentage change in
quantity demanded divided by the percentage change in price (Mankiw G.N 2008).

FORMULA

(A) The following are the types of Price elasticity of demand

 Perfect elastic of demand, refers to the situation where the slightest rise in price
cause the quantity demanded fall to zero. At the present level of price level, people
demand infinitely large quantity of the commodity.

 Perfect inelastic of demand, it refers to the situation where even substantial change
in price do not make any change in quantity demanded. That for any change in price
the demand remains constant.
 Relatively elastic of demand; this means a small proportionate change in the price
of a commodity results in a larger change proportionate change in its quantity
demanded. The coefficient of elasticity of demand is greater than unity.

 Relatively inelastic of demand; this means a larger proportionate change in the price
of a commodity results in a smaller proportionate change in its quantity demanded.
The coefficient of elasticity of demand is greater than zero but less than unity.

 Unitary elastic of demand; it refers to the situation where a given proportionate

change in a price is accompanied by an equality proportionate change in quantity of
goods demanded.
(B) The following are the determinants of price elasticity of demand.
 Degree of necessity; when other things being equal the demand of goods
according to necessities is elastic or inelastic when goods are basic needs or
luxurious where whatever the price is high people ca not live without them are
inelastic. The demand for necessity without a substitute is less elastic than
demand for necessity which are luxurious. The demand for salt is more than the
demand of alcohol.
 Availability of close substitute; goods with substitute tend to have more elastic
demand because it is easier for consumers to switch from that good to others.
Example phones, cars and computers are easier substitutable but foods without a
close substitute the demand for food is less elastic than the demand for phones.
 Definition of market; the elasticity of demand in any market depends on how the
boundaries of the market are drawn. Narrow defined markets tend to have more
elastic demand that broadly defined market because it is easier to find close
substitute for narrow defined goods. Example the foods have no good substitute
where are inelastic because foods are in the broader markets.
 Time horizon; this is the determinant which determines the elastic or inelastic of
goods due to the length of time of goods in the market. The goods tend to be
elastic demand rises in the short time while the quantity of goods of demand falls
when the good of demand within the long time. Goods tend to be more elastic
demand over long time horizon where the price decrease and vice versa.
 Consumer income; the income of consumer also affects the elasticity of demand.
For high group the demand is said that to be less elastic as the rise as fall in the
price will not have much effect on the demand of a product, whereas in case of
the low income groups, the demand is said to be in the elastic and rise and fall in
the price have a significant effect on the quantity demanded. Such as when the
price falls the demand increases and vice versa.
  Amount of money spent; the elasticity demand for a product is determined by
proportion of income spent by the individual on that product. In case of certain
goods such as matchbox, salt as consumer spends as very small amount of
income, then even if their price rises the demand for these products will be
affected to a great extent. Thus the demand for such products is said to be
inelastic and therefore if there is any change in the price of these items the
demand will get affected.
 Range of price; the price range is which the commodities price is high or low
affect the elasticity of demand, such as the higher range products are usually
brought by the rich people and they do not care about the change in the price
and hence the demand for such higher range commodities is said to be inelastic.
Also the lower range commodities have inelastic demand because these have low
price.

(C).
o Inelastic goods; are the goods or items for necessities, also are goods that have
inelastic demand where are the goods or services which does not change in response
to the fluctuations in price such demand of these goods is sensitive to price. Where
if the price of these goods rises the demand rises too.
Example of these goods are, food, water, medicine and clothing.
o Elastic goods; are goods that have significant chance in demand or supply in
response to the change in price. These are goods that are not considered necessities
or goods for which there are substitutes. Example, soft drinks, clothes, cars and
electronics.
 QUESTION 07

Price elasticity of demand; measures how much the quantity supplied responds to the
changes in the price. Supply of goods or services is said to be elastic if the quantity supplied
responds substantially to the change in the price. Supply is said to be inelastic if the quantity
supplied responds only slightly to the change in the prices. The price to elasticity of supply
depends on the flexibility of sellers to change the amount of the goods they produce. This
can be expressed by percentage or formula method (Mankiw G.N 2008).
FORMULA.

7. (A). The following are the types of price elasticity of supply

o Elastic supply; this is the type of price elasticity of supply where it is said to elastic
when the percentage change in price brings the larger proportionate change in
quantity supplied, mathematically the size of elasticity is greater than 1 (Pe>1)
o Inelastic supply, this is said to inelastic when the percentage where the change in
price brings small percentage change in quantity supplied. Mathematically is
calculated than is less than 01 but greater than zero (0<Es<1)

o Unitary elastic supply; this is due to that if a proportional change in price brings the
equal proportionate change in quantity supplied. Numerically the measure is equal
to one.

o Perfect elastic supply; this is the measure of quantity supplied where if at a same
level of price, the quantity supplies changes. Mathematically the measure is
unidentified.
 o Perfectly inelastic supply; this is said to be perfectly elastic supply when the change
in price brings to change in price brings no change in quantity supplied. Numerically
the measure is equal to zero.

(B) The following are the determinants of price elasticity of demand.

o Marginal cost; as the cost of producing on more unit arising without put or marginal
costs which are increased costs related to each additional unit produced. If are
arising rapidly with the output, then the rate of output or production will be limited.
So the price elasticity of supply will be inelastic which means that the percentage of
quantity supplied change less than the change in price.
o Time; as the price elasticity of supply increases over time, producers would increase
the quantity supplied by a greater percentage than the price increases.
o Number of firms; it is more likely that the supply will be elastic when there is one a
large number of firms. This occurs because other firms can step in to fill the supply
gap for the quantity of goods supplied.
o Mobility factors of production, when the factors of production are mobile then the
price elasticities of supply are high. Example the availability of land and raw
materials makes the production easy hence high supply of goods.
 QUESTION 08.
Income elasticity of demand; is a measure of how the quantity demanded of goods
responds to a change in consumer’s income. It is calculated as percentage change in
quantity demanded divided by the percentage change in income (Farhad A. 2004).

FORMULA

(A) Types of income elasticity of demand

o High income elasticity of demand; a rise in income brings the bigger increase in
quantity demanded.
 o Unitary income elasticity of demand; the rise in income is proportionate to the
increase in quantity demanded.
o Low income elasticity of demand; the increase in income is less than proportionate
to increase in quantity demanded.
o Zero income elasticity of demand; this is where the quantity demanded is the same
even if the income changes.
o Negative income elasticity of demand; an increase in income brings the decrease in
quantity demanded.

(B)
Inferior goods, these are the goods which its demand falls when the people’s income rises.
This happens where the person decided to buy the substitute good after the income
increase.
When the income of the consumer’s income rises; decides to consume the substitute good
of the inferior good of higher level. For example, when a person with lower income uses
charcoal for cooking and firewood then when the income increases decides to use gas for
cooking, thus the demand of charcoal fall.

REFFERENCES
Mankiw G.N. (2008). Principles of Micro economics. 5th Ed. New York. South-Western
Cengage.
Farhad A. (2004). The economic Perspectives. New York: Westchester Community College
Pres.