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SS2: ECONOMICS - 2ND TERM

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  1. Unit or unitary elastic demand Ed = 1
  2. Elastic demand Ed>1
  3. Inelastic demand Ed<1
  4. Perfectly inelastic demand Ed = 0
  5. Perfectly elastic demand Ed = ∞

Note: The elastic/ inelastic and the unitary are normal cases while the perfectly are the subnormal cases

1. Unit or Unitary Elastic Demand

Elasticity of demand is said to be unitary if a change in price leads to an equal change in quantity demanded e.g. 40% change in price leads to a 40% change in demand. ED = 1

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2. Inelastic demand/fairly inelastic demand

Demand is inelastic if a change in price leads to a less than proportional change in the quantity demanded. A 35% change in price brings about a less than 35% decrease in quantity demanded. This is when a change in price brings about a less than proportionate change in quantity demanded. 

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3. Perfectly inelastic demand

This is the case where quantity demand remains the same irrespective of the change in price.  Quantity demanded remains constant. The demand curve is parallel to the price axis or y-axis. E = O

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4. Elastic demand

Demand is elastic if a small percentage change in price brings about a more than proportional change in the quantity of a commodity demanded. Demand is elastic when a change in the quantity of goods demanded. E.g. 15% fall in price leads to a 40% rise in quantity demanded. A 20 % increase in price brings about a more than 20% decrease in the quantity demanded.

Elastic demand - Economics SS2

5. Perfectly elastic demand/infinitely elastic

In this case, consumers react sharply to changes in price. Demand is said to be perfectly elastic when a change in price brings about an infinite effect on the quantity of goods demanded. Consumers are willing to buy all the quantities of the commodity at the current price and will buy nothing at a slight change in price. E.g. 5% increase in price will make demand drop to nothing 

Here the demand curve is parallel to the quantity axis or X-axis. In this case, any slight increase in price will make consumers stop buying the commodity while a slight decrease in price will make consumers purchase all the quantity of the commodity available. If demand is perfectly elastic, the quantity of a commodity bought at higher prices ranges from zero to infinite

Perfectly elastic demand/infinitely elastic

Note the following

  1. If Ed=1 it is unitary elasticity
  2. If Ed<1 it is fairly/ inelastic demand
  3. If Ed>1 it is fairly/ elastic demand
  4. If Ed=0 it is perfectly inelastic demand
  5. If Ed=∞ it is perfectly elastic demand

Evaluation Questions

1. Determine the equilibrium price and quantity using the demand and supply curve.

2. When the price of a bag is N20 the quantity demanded is 60, when the price increases to 30 per bag, the quantity demanded is 40. Find the elasticity of demand.

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Evaluation questions

  1. Determine the equilibrium price and quantity using the demand and supply curve.
  2. When the price of a bag is N20 the quantity demanded is 60, when the price increases to 30 per bag, the quantity demanded is 40. Find the elasticity of demand.

 

Solution

1. Determine the equilibrium price and quantity using the demand and supply curve.

2. When the price of a bag is N20 the quantity demanded is 60, when the price increases to 30 per bag, the quantity demanded is 40. Find the elasticity of demand.

Method 1

Elasticity of Demand = \( \left ( \frac {Q_0 \; – \; Q_1}{Q_0} \right) \; \div \; \left ( \frac {P_0 \; – \; P_1}{P_0} \right) \\ = \left ( \frac {60 \; – \; 40}{40} \right) \; \div \; \left ( \frac {20 \; – \; 30}{20} \right) \\ =  \frac{20}{60} \; \div \; \frac{-10}{20} \\ = \frac{20}{60} \; \times \; \frac{20}{-10} \\ = \frac{-2}{3} \\ = \scriptsize 0.67  \)

Method 2

Change in quantity = 60 – 40 = 20

% change in quantity = \( \frac{20}{60} \; \times \; \frac{100}{1} \\ =  \scriptsize 33.3 \% \)

Change in price = 20 – 30 = -10

% change in price = \( \frac{-10}{20} \; \times \; \frac{100}{1} \\ =  \scriptsize – \; 50 \% \)

Elasticity of demand = \( \frac{\% change  \; in  \; quantity}{\% change  \; in  \; price} \)

= \( \frac{33.3 \%}{50 \%} \\ = \scriptsize – \; 0.67 \\ = \scriptsize \; 0.67 \)

The elasticity of demand for the commodity is inelastic because the co-efficient is less than one.

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