Elasticity concepts generally deal with the response(s) of demand or supply to its determinant; in the course of our discussion of demand and supply, their determinants were discussed.
The Elasticity of Demand and Supply.
Elasticity measures the extent of change in the quantity of a commodity demanded by a consumer or supplied by the producer, as a result of small change basically in prices and income; these are the elasticity of the major areas revolves around. Each of these will be looked at in turn.
In this article, both elasticities of demand and supply will be dealt with simultaneously since their interpretation is the same, the only difference between them is the symbol “ed” and “es”, which imply quantity demanded and quantity supplied respectively.
This means the degree of responsiveness of quantity demanded or supplied of a commodity to a small change in the price of that commodity. It examines the effect of a 1% change in the price of a commodity on quantity bought, purchased or supplied of such commodity.
In calculating the price elasticity of demand, the result will always be negative. This simply implies the law of demand that says the higher the price the lower the quantity demanded. So when the price rises, the quantity demanded falls. There exists an inverse relationship between the price and quantity, that is why it is resulting in a negative. When interpreting the result, the negative sign may be ignored or there may need to multiply by a negative sign to make the elasticity coefficient positive.
Elasticity value can vary from zero (0) to infinity (∞), any given coefficient in and within this numerical range denotes a percentage change in quantity demanded as a result of a corresponding percentage change in price. Calculated figures or values can fall into various categories, which can be any of the categories discussed below:
Elastic Demand or Supply:
Demand or supply is said to be elastic if and only If, a small change in price brings an about greater or large change in quantity demanded or supplied i.e. if a small change in price brings about a more than proportionate change in quantity demanded or supplied, numerically the elasticity coefficient is greater than one.
Demand or supply is said to be inelastic if a change in price leads to a relatively small change in quantity demanded or supplied of such goods, i.e., if a small change in price brings about less than proportionate change in quantity, demanded or supplied, numerically the elasticity coefficient will be less than one, noting that it is greater than zero.
Unitary or Unit Elasticity of Demand/Supply
Elasticity of demand is said to be unitary, if a change in price brings about or leads to an equal chance in the quantity demanded or supplied of a good or commodity i.e. when a small change in price brings about an equal proportionate change in quantity demanded or supplied, numerically the elasticity coefficient will be exactly equal to one.
Perfectly / Infinitely Elastic Demand/Supply
Demand and supply are said to be perfectly elastic if a small change in price brings about an infinitely or relatively large response in quantity demanded or supplied. Here is a case in which an upward movement of price will make the consumer stop buying the goods in question, while a slight decrease will make the consumer purchase all the quantity of the goods available. Numerically the elasticity coefficient is said to approach infinity (→ ∞).
Perfectly Inelastic Demand and Supply
Demand or supply is said to be perfectly inelastic if a given change in price results in no change in quantity demand or supply. In this type of elasticity change(s) in the price level has no effect whatsoever on the number of goods to be demanded or supplied. i.e. the quantity level does not change irrespective of changes in the price level. The elasticity coefficient here is zero, and this explains why it is also described as zero elastic demand or supply.
Income Elasticity of Demand
Income elasticity of demand measures the degree of responsiveness of demand to changes in the income level of the consumer. It examines the relationship that exists between income level and quantity demanded. Income elasticity is used in classifying goods into normal, ostentatious or luxury, and inferior goods. Positive income elasticity of demand is related to normal and superior goods, while negative income elasticity is related to inferior goods.
Cross Elasticity of Demand
This measures the degree of responsiveness of demand for a product or goods to changes in the price of another good.
Given a two-commodity world X and Y, cross elasticity of demand is defined as percentage change quantity demanded of x as a result of a given percentage change in the price level of y. The concept of cross elasticity yields a useful criterion for categorizing goods in terms of substitutes and complements.