Elasticity of Demand

ELASTICITY OF DEMAND
Price Elasticity - ( PED ) This is the responsiveness of the quantity

demanded or supplied by consumers or producers to a given change in
price.
PED = % change in quantity demanded

% change in the price
Types of Elasticity of Demand
1. Price elasticity of demand

2. Cross elasticity of demand
3. Income elasticity of demand
Degrees of elasticity -
Determinants of PED
CROSS ELASTICITY - ( XED) -Definition: This is how responsive the

quantity demanded by consumers of product a is to a change in price of
product B.
XED = % change in the quantity of A
% change in the quantity of B
Applications of price elasticity of demand
Applications of PED:
1. Governments: if inelastic (low) PED → less consequence if P → impose more indirect tax
2. Firms: if inelastic (low) PED → more revenue if P → price of the product rises
Exam style question-
Q 1 - Explain why price elasticity of demand (PED) varies along the
length of a straight line.[ 10 Marks]
Answer - The price elasticity of demand (PED) measures the

responsiveness of quantity demanded to a change in price. On a
straight-line (linear) demand curve, the price elasticity of demand varies
along its length due to the mathematical nature of the elasticity formula.
At high prices (upper part of the curve), a small percentage change in price
results in a large percentage change in quantity demanded. Therefore, PED
is more elastic at high prices, meaning that consumers are more
responsive to price changes when prices are high.
At low prices (lower part of the curve), a percentage change in price results
in a relatively smaller percentage change in quantity demanded. Thus, PED
becomes more inelastic at low prices, meaning that consumers are less
responsive to price changes when prices are lower.
Elasticity considers percentage changes. When the base (price or quantity)
is smaller, a given change represents a larger percentage, increasing
elasticity at high prices and decreasing it at low prices.
● At the upper end of the demand curve, where prices are high and
quantities are low, demand is elastic (PED > 1).
● At the midpoint, demand is unit elastic (PED = 1).
● At the lower end, where prices are low and quantities are high,
demand is inelastic (PED < 1).
This variation in elasticity along a straight-line demand curve reflects the

diminishing sensitivity of consumers to price changes as prices fall and
quantities increase.
Q 2 - Explain two reasons why the demand for primary product might be
relatively price inelastic. [10]
The demand for primary goods is often relatively inelastic, meaning that
changes in price lead to relatively small changes in the quantity demanded.
Several factors explain why primary goods, such as food, raw materials,
and energy sources, tend to exhibit inelastic demand:
1. Necessity of Primary Goods:
● Primary goods are often essential for basic consumption or

production processes, meaning that consumers and producers need
them regardless of price changes. For example, food and energy are
fundamental needs, so people cannot easily reduce their
consumption even if prices rise.
2. Lack of Close Substitutes:
● Many primary goods have few, if any, substitutes. For instance, oil and
natural gas are primary energy sources, and there are limited
alternatives that can immediately and effectively replace them for
many uses. This lack of substitutes makes consumers less
responsive to price changes.
3. Small Proportion of Consumer Budgets (in some cases):
● For certain primary goods, particularly basic food items, the expense
may represent a relatively small proportion of a consumer's total
budget. When this is the case, even if prices increase, the impact on
overall spending is limited, so consumers are less likely to change
their quantity demanded significantly.
4 Habitual Consumption:
● Primary goods are often consumed out of habit or tradition,

especially for staple foods. This habitual nature of consumption
makes demand less sensitive to price changes.
In summary, the demand for primary goods tends to be relatively inelastic

because these goods are essential, lack substitutes, and are often
purchased out of necessity. Consumers and producers have limited
flexibility to adjust consumption in response to price changes, making
demand less responsive.

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ELASTICITY OF DEMAND

Price Elasticity - ( PED ) This is the responsiveness of the quantity

PED = % change in quantity demanded

Types of Elasticity of Demand

1. Price elasticity of demand

CROSS ELASTICITY - ( XED) -Definition: This is how responsive the

Applications of price elasticity of demand

Answer - The price elasticity of demand (PED) measures the

This variation in elasticity along a straight-line demand curve reflects the

1. Necessity of Primary Goods:

● Primary goods are often essential for basic consumption or

2. Lack of Close Substitutes:

3. Small Proportion of Consumer Budgets (in some cases):

● Primary goods are often consumed out of habit or tradition,

In summary, the demand for primary goods tends to be relatively inelastic

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