Module 3

Concept of Elasticity
Unit 1: Definition & Types of Elasticity of Demand
Unit 2: Methods of Measuring Price Elasticity of Demand
Unit 3: Income Elasticity of Demand
Unit 4: Cross Elasticity of Demand
Unit 5: Factors Affecting Elasticity of Demand
Unit 6: Definition and Determinants of Price Elasticity of Supply
 Unit 1
Definition & Types of Elasticity
of Demand
1.0 Introduction
2.0 Learning Outcomes

6.1 Learning Content

6.2 Definition of Elasticity of Demand
6.3 Types of Elasticity of Demand
6.4 Degrees of Elasticity of Demand with diagrams
4.0 Conclusion
5.0 Summary

6.0 Tutor-marked assignment

7.0 References/Further Reading
1.0 Introduction
This introductory unit explains the concept of Elasticity and how it is applicable to demand and supply in
Economics. Elasticity means the ability of an object or material to resume its normal shape after being stretched or
compressed. This concept is used in economics to examine the degree of changes in demand or supply as a result
of changes in their determinants such as price, price of other goods and income of consumers. In other words, if
there are changes in any factor such as, the product’s own price, price of related products or consumers’ income,
how does it affect demand or supply? To what extent or degree or proportion does demand or supply change as a
result of a change in any of the aforementioned factors?

2.0 Learning Outcomes

At the end of this unit, you should be able to:
I. define elasticity of demand in simple terms;
II. list the 3 types of elasticity of demand;
iii. be able to differentiate between the various degrees of elasticities & identify each diagram;

3.0 Learning Content

3.1 Definition of Elasticity of Demand

Elasticity is an economic concept used to measure the change in the aggregate quantity of a good/service in relation
to price movements of that good/service or changes in other factors that determine demand for that good/service
such as; income of consumers or prices of related products.
Elasticity of demand is defined as the degree of responsiveness of quantity demanded of a commodity to a change
in any of the factors that affect the demand of the commodity. The three determinants of demand usually considered
are price, income and price of related commodities.

3.2 Types of Elasticity of Demand

There are many elasticities of demand. The most important of these are:

a. Price elasticity of demand

b. Income elasticity of demand
c. Cross elasticity of demand

a. Price elasticity of demand

This is the degree of responsiveness of demand to a change (increase or decrease) in price. In the words of
Prof. Lipsey, “Elasticity of demand may be defined as the ratio of the percentage change in demand to the
percentage change in price”. It is calculated as follows:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 % 𝛥𝑄𝑑

Ep = =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 % 𝛥𝑝
The coefficient of price elasticity of demand is always negative because when price changes, demand
moves in the opposite direction. It is however customary to disregard the negative sign. If the percentage
for quantities and prices are known, the value of the coefficient can be calculated. Price elasticity of
demand may be unity, greater than unity, less than unity, zero or infinite. These five cases are explained
with the aid of Figure 11

Figure 11: Types of Price Elasticity of Demand

Price (B) Fairly/ Moderately Price

D (A) Unitary Price D D
P2 Elastic (B) Fairly/ Moderately
Elasticity Inelastic
P2 EP =1
EP >1 P2
EP <1
P1
D
P1 P1
D
D

Q2 Q1 Q2 Q1 Q2 Q1
Quantity Demanded Quantity Demanded Quantity Demanded

Price D (D) Perfectly Price (E) Perfectly

Inelasticity Elastic
P2 EP = 0 EP = ∞
P D
P1

D
Q Q1 Q2
Quantity Demanded Quantity Demanded

Price elasticity of demand is said to be Unity/Unitary when the change in demand is exactly proportional
to the change in price. This is illustrated in Graph ‘A’.

When change in demand is more than proportional to the change in price, price elasticity of demand is
greater than unity and it is known as Fairly/Moderately/Relatively elastic demand. Graph ‘B’ depicts this
form of elasticity. If, however, the change in demand is less than proportional to the change in price, price
elasticity of demand is said to be less than unity. This is also called Fairly/Moderately/Relatively inelastic
demand. Graph ‘C’ shows this situation.

Graph ‘D’ projects Zero elastic demand, which implies that whatever the change in price; there is
absolutely no change in demand. This is also called Perfectly inelastic demand.

Lastly, demand is said to be Infinitely elastic when a very small change in price leads to an infinitely large
change in demand. This case is also known as Perfectly elastic demand and it is represented by graph ‘E’.
4.0 Conclusion
In this unit, we discussed the definition as well as the types of elasticity of demand. The unit also explained
the degrees of elasticity with various curves for each. The degree of elasticity could be elastic or inelastic
depending on the type of commodity.

5.0 Summary
In this unit, we listed the three types of elasticity namely; price, income and cross elasticities of demand.
Also, in this unit, we have been able to discuss in detail the five categories of degrees of elasticity ranging
from fairly elastic, fairly inelastic, unitary elastic, zero elastic to infinitely elastic demands. All these have
been explained with the aids of their individual graphs for better understanding of the concepts.

6.0 Tutor Marked Assignment

(i) What is Price Elasticity of demand?
(ii) Distinguish between perfectly elastic and perfectly inelastic demands.

7.0 References/Further Reading

M. L. Jhingan, (2003). The Theory of Economics
 Unit 2
Methods of Measuring Price
Elasticity of Demand
1.0 Introduction
2.0 Learning Outcomes
3.0 Learning Content
3.1 The Percentage Method
3.2 The Point Method
3.3 The Arc Method
3.4 The Total Outlay/Expenditure Method
4.0 Conclusion
5.0 Summary
6.0 Tutor-marked assignment
7.0 References/Further Reading
1.0 Introduction
In unit 1, we learnt the three types of elasticity of demand which are price, income and cross elasticities.
In this unit, we shall be taking a look at the price elasticity of demand and we will be discussing the four
methods of calculating price elasticity of demand in economics. Under each method, examples shall be
given for a better understanding of the various methods.

2.0 Learning Outcome

At the end of this unit, you should be able to;

(i) List the four methods of measuring price elasticity of demand;

(ii) Calculate price elasticity of demand using any method.

3.0 Learning Content

3.1 The Percentage Method
The price elasticity is measured by its coefficient Ep. This coefficient Ep measures the percentage change
in quantity of a commodity demanded resulting from a given percentage change in its price. In other words,
this method measures the ratio of the percentage change in quantity demanded to a change in the price of
the commodity. The formula is given as:
%∆𝑄𝑑
EP= %∆𝑃

Where:

𝑁𝑒𝑤 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦−𝑂𝑙𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 100

%∆Q = ×
𝑂𝑙𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 1

𝑁𝑒𝑤 𝑃𝑟𝑖𝑐𝑒 − 𝑂𝑙𝑑 𝑃𝑟𝑖𝑐𝑒 100

%∆P = ×
𝑂𝑙𝑑 𝑃𝑟𝑖𝑐𝑒 1

Alternatively, this can be re-written as follows;

∆𝑄 ∆𝑃
Ep = ÷
𝑄 𝑃

∆𝑄 𝑃
Ep = ∆𝑃 × 𝑄

If Ep > 1, demand is elastic. If Ep < 1, demand is inelastic, and Ep = 1, if demand is unitary elastic.

Example 1:
Suppose the price of a commodity falls from ₦50.00 per kilogram to ₦30.00 per kilogram, and the quantity
demanded of that commodity increases from 100kg to 300kg. Determine the price elasticity of demand for
the said commodity using the percentage method. What type of elasticity does the commodity have?
 Solution

∆𝑄 𝑃
Ep = ∆𝑃 × 𝑄

200 50
Ep = −20 × 100

∴ Ep = -5

The commodity is said to have an elastic demand because the coefficient of Ep is 5 which is greater than
1. It should be noted, however, that the negative sign in price elasticity of demand is not significant.

3.2 The Point Method

Prof. Marshall devised a geometrical method of measuring elasticity at a point on the demand curve. Let
RS be a straightline demand curve in Figure 12. If the price falls from PB (OA) to MD (OC). The quantity
demanded increases from OB to OD. Elasticity at point P on the RS demand curve according to the formula
is:

∆𝑞 𝑝
Ep = ∆𝑝 × 𝑞

Figure 12: Point Method

R
Price
A P
∆P
M
C
Q
∆q
O B D S
Quantity Demanded

∆q = BD = QM
∆p = PQ
p = PB & q = OB
Substituting these values in the elasticity formula:

𝑄𝑀 𝑃𝐵
Ep = × 𝑂𝐵
𝑃𝑄

Moreover,
𝑄𝑀 𝐵𝑆
= 𝑃𝐵 [ <PQM=<PBS being right angles and PQM and PBS are similar
𝑃𝑄
triangles]

𝐵𝑆 𝑃𝐵 𝐵𝑆
∴ 𝑃𝐵 = 𝑂𝐵 = 𝑂𝐵
Since ∆PBS and ∆ROS are similar,

𝐵𝑆 0𝐴 𝑃𝑆 𝐿𝑜𝑤𝑒𝑟 𝑠𝑒𝑔𝑚𝑒𝑛𝑡
Ep at point P = = 𝐴𝑅 = 𝑃𝑅 =
0𝐵 𝑈𝑝𝑝𝑒𝑟 𝑠𝑒𝑔𝑚𝑒𝑛𝑡

With the help of the point method, it is easy to point out the elasticity at any point along a demand curve.

Example 2

Given that Q = 65 – 0.5P, determine the coefficient of price elasticity of demand at the price of:
a) 50
b) 80

Solution
∆𝑞 𝑝
Recall again that Ep = ∆𝑝 × 𝑞

i. ∆q demands that we determine the slope of the demand function. Accordingly, the slope of the
demand function is -0.5
ii. Given that price is 50, we can determine the value of Q by substituting 50 for P in the demand
equation. This gives us 40.
iii. By substituting in the elasticity formula, the coefficient of price elasticity of demand at the price
of 50 will be:

50
Ep = −0.5 × 40

= -0.63

iv. At the price of 80, the value of Q is determined by substituting 80 for P in the demand equation
which gives us 25, therefore:
80
Ep = −0.5 × 25

= -1.6
In conclusion therefore, we can say that the demand for the commodity at P = 50 gives an inelastic
demand while demand is elastic at P = 80.

3.3 The Arc Method

The coefficient of elasticity depends on the direction (upward or downward along a demand curve) of the
changes in prices and quantities. This means that between two values of prices and quantities, elasticity
will differ depending on the direction of movement even if the prices and quantities are the same. The arc
method uses the midpoints (averages) of both prices and quantities in the ratio of P/Q. The formula is
stated below:

∆𝑄 𝑃̅
Arc EP = ∆𝑃 × 𝑄̅
Where:
∆Q= Q1− Q2

∆P = P1 − P2

𝑃1 +𝑃2
𝑃̅ = 2

𝑄1 +𝑄2
𝑄̅ = 2

Example 3:
Given that Po = 50, P1 = 80, Qo = 40, Q1 = 25. Using the arc method,
calculate the coefficient of price elasticity of demand.

Solution
∆Q = 25 – 40 = -15

∆P = 80 – 50 = 30

Po + P1 = 50 + 80 = 130

Qo + Q1 = 40 + 25 = 65

Arc Ep = ∆Q ×𝑃̅
∆P 𝑄̅

= 15 ×130 = -1
30 65
The price elasticity of demand is therefore unitary. This is because the coefficient of price elasticity is
equal to 1. And as mentioned in the beginning of this module, generally, in calculating price elasticity of
demand using any method, the negative sign is usually disregarded.

3.4 The Total Outlay or Expenditure Method

This method uses the effect in the price of a commodity on expenditure (on the part of buyers) or revenue
(on the part of sellers) to determine the price elasticity of demand. When the total or expenditure arising
from a price cut increases, demand is said to be elastic. If the price of the commodity rises and total revenue
or expenditure falls, demand for that commodity is also elastic.
If total revenue increases as a result of an increase in price, demand is inelastic. The same inelastic demand
will apply when total revenue or expenditure falls as price falls. However, if a price fall or rise leaves total
revenue unchanged, demand is unitary.

4.0 Conclusion
So far in this unit, we have discussed the 4 methods of measuring price elasticity of demand. From the
percentage method to the expenditure method.
5.0 Summary
In this unit, we have been able to solve some practical examples of price elasticity of demand using the
percentage, point, arc as well as the total outlay methods.

6.0 Tutor Marked Assignment

i. If the price of a commodity decreased from $12.00 to $6.00 and the quantity demanded increased from
40 units to 50 units, determine the price elasticity of demand for the commodity using the percentage
method.
ii. What type of elasticity does the commodity have?

7.0 References/Further Reading

M. L. Jhingan, (2003)
Case, E.K., Fair,R.C., & Oster, S.M. (2013). Principles of Economics (19TH Ed.). Pearson Education
Limited, England.
Friedman, D. D. (1990). Price Theory: An Intermediate Text. South-Western Publishing Co.
Hal, R. V. (2002). Intermediate Microeconomics: A Modern Approach. (6th ed.). New York: Norton.
Harvey, J. (1978). Modern economics (3rd ed.). The MacMillan Press Ltd., London.
Lipsey, R., & Chrystal, A. (2008). Economics. Oxford University Press Inc., New York
 Unit 3
Income Elasticity of Demand

1.0 Introduction
2.0 Learning Outcomes
3.0 Learning Content
3.1 Definition of Income Elasticity of Demand
3.2 Formular for calculating Income Elasticity of Demand with Examples
4.0 Conclusion
5.0 Summary

6.0 Tutor-marked assignment

7.0 References/Further Reading
1.0 Introduction
Earlier in unit 1, we listed the three types of elasticity of demand which are, price, income and cross
elasticities. We discussed the price elasticity in unit 2, now we shall be discussing the income elasticity of
demand and we will solve examples related to it.

2.0 Learning Outcome

At the end of this unit, you should be able to;
i. define income elasticity of demand;
ii. solve any given problem using the income elasticity formular;
iii. determine whether a given commodity is normal, inferior or a necessity good.

3.0 Learning Content

3.1 Definition of Income Elasticity of Demand
Income elasticity of demand is defined as the degree of responsiveness of quantity demanded of a
commodity to a change (increase or decrease) in the consumer’s income. In other words, this is the ratio
of a change in quantity demanded to a change in the income of the consumer.

3.2 Formula for Calculating Income Elasticity of Demand

Income elasticity of demand is represented by the symbol Ey and it is calculated using the formular given
below;
%∆𝑄
Ey =
%∆𝑦

Where:

𝑁𝑒𝑤 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 −𝑂𝑙𝑑 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 100

%∆Q = ×
𝑂𝑙𝑑 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 1

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 −𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑖𝑛𝑐𝑜𝑚𝑒 100

%∆y = ×
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 1

∆𝑄 ∆𝑦 ∆𝑄 𝑦
= ÷ = ×
𝑄 𝑦 ∆𝑦 𝑄

It should be noted that for inferior goods, Ey = Negative i.e. less is demanded as income increases.
For normal goods, Ey = positive i.e. more is demanded as income increases.
For necessity goods, Ey = 0 i.e. quantity demanded remains the same regardless of change in income.
Example 1

Mr. Akin’s income increased from N 1,500 to N 2,200 and his demand for commodity X decreased from
600 units to 550 units. Calculate the income of elasticity for commodity X. what type of good is commodity
X?

Solution

∆𝑄 𝑦
Recall that Ey = ×
∆𝑦 𝑄

Where; ∆𝑄 = New quantity – Old quantity

= 550 – 600
∴ ∆𝑄= - 50
And Q = 600

∆𝑦 = Current income – Previous income

= 2200 – 1500
∴ ∆𝑦 = 700

And y = 1500

Substituting the values into the formular we have;

−50 1500
Ey = ×
700 600

Ey = - 0.0714 x 2.5
Ey = - 0.1785 ≅ - 0.2
Ey = - 0.2

Therefore, the income elasticity of demand for commodity X is -0.2. this shows that commodity X is an
inferior good because the coefficient of income elasticity is negative. This also implies that the consumer’s
demand for commodity X reduces as his income rises.

4.0 Conclusion
This unit explained what income elasticity is and the formular for calculating income elasticity was given.
Also, an example was solved using the given formular to determine the type of commodity in question.

5.0 Summary
In this unit, income elasticity which is the focal sub-heading here was defined as the degree of
responsiveness of demand to changes in consumer’s income. It was established in this unit also that the
sign of the coefficient of income elasticity is of utmost significance because it helps to determine the type
of commodity being examined. A commodity can be an inferior, a necessity or a normal good.
6.0 Tutor Marked Assignment
i. What is Income elasticity of demand?
ii. If the coefficient of elasticity Ey for a given commodity is 0.5, what type of commodity would you say
this is and why?

7.0 References/Further Reading

Case, E.K., Fair,R.C., & Oster, S.M. (2013). Principles of Economics (19TH Ed.). Pearson Education
Limited, England.
Friedman, D. D. (1990). Price Theory: An Intermediate Text. South-Western Publishing Co.
Hal, R. V. (2002). Intermediate Microeconomics: A Modern Approach. (6th ed.). New York: Norton.
Harvey, J. (1978). Modern economics (3rd ed.). The MacMillan Press Ltd., London.
Lipsey, R., & Chrystal, A. (2008). Economics. Oxford University Press Inc., New York
 Unit 4
Cross Elasticity of Demand
1.0 Introduction
2.0 Learning Outcomes
3.0 Learning Content
3.1 Definition of Cross Elasticity of Demand
3.2 Formular for calculating Cross Elasticity of Demand with Example

4.0 Conclusion
5.0 Summary

6.0 Tutor-marked assignment

7.0 References/Further Reading

1.0 Introduction
This unit is linked to the previous units 1, 2 and 3. The cross elasticity of demand just like the price and
income elasticities takes a look at one of the determinants of demand which is the price of other
commodities and how it relates to quantity demanded. In this unit, we shall discuss how changes in the
price of one commodity affects the demand for a related commodity.

2.0 Learning Outcome

At the end of this unit, you should be able to;
i. define cross elasticity of demand;
ii. solve any given problem on cross elasticity of demand using the formula given;
iii. establish the type of relationship between two commodities based on the sign of coefficient of
elasticity.

3.0 Learning Content

3.1 Definition of Cross Elasticity of Demand
Cross elasticity of demand is defined as the degree of responsiveness of quantity demanded of a good; say
‘a’, to a change in the price of another related good, say ‘b’. It looks at the change (either increase or
decrease) in the demand for one commodity as a result of a change (increase or decrease) in the price of a
related commodity. Hence the name ‘cross’. For cross elasticity of demand, the sign of the coefficient of
elasticity is significant because it helps to determine how the two commodities are related.

3.2How to calculate Cross elasticity of demand

The cross elasticity of demand between ‘a’ and ‘b’ is symbolized by Eab and it is calculated using the
formula:

%∆𝑄𝑎
Eab = %∆𝑃𝑏

∆𝑄𝑎 ∆𝑃𝑏 ∆𝑄𝑎 𝑃𝑏

Eab = ÷ = ×
𝑄𝑎 𝑃𝑏 𝑄𝑎 ∆𝑃𝑏

It should however be noted that for cross elasticity, the sign of the coefficient of cross elasticity is highly
significant. This is because it helps to determine the nature of the relationship between two commodities.
For substitute goods, Eab is positive. While Eab is negative for complementary goods and for goods that
are unrelated, the cross elasticity between ‘a’ and ‘b’ is zero. Unrelated goods here imply goods that are
neither substitutes nor complementary.

Example 1

If the demand for commodity ‘a’ increases from 500 units to 800 units as a result of an increase in the price
of another commodity ‘b’ from N300 to N390, what is the cross elasticity of demand between commodities
‘a’ and ‘b’?
Solution

∆Qa = 800 – 500 = 300

∆Pb = 390 – 300 = 90
Previous Qa = 500
Previous Pb = 300

300 300
∴ Eab = 500 × 90

Eab = 2

This shows that commodities ‘a’ and ‘b’ are substitute goods because the coefficient of cross elasticity
between the two goods is positive.

4.0 Conclusion
We have so far defined cross elasticity of demand and the formula for calculating the coefficient of
elasticity was given. It is advisable to take further glance at this unit to understand it better and to avoid
confusion.

5.0 Summary
We have been able to take a look at the cross elasticity between the price of one good in relation to the
quantity of another good. A numerical example was solved given the formular for calculating the cross
elasticity between the two goods. Two goods can be close substitutes, complementary or unrelated goods.

6.0 Tutor Marked Assignment

i. What is Cross elasticity of demand?
ii. If the coefficient of elasticity is zero, what is the relation between the two commodities?

7.0 References/Further Reading

Hal, R. V. (2002). Intermediate Microeconomics: A Modern Approach. (6th ed.). New York: Norton.
Case, E.K., Fair,R.C., & Oster, S.M. (2013). Principles of Economics (19TH Ed.). Pearson Education
Limited, England.
Friedman, D. D. (1990). Price Theory: An Intermediate Text. South-Western Publishing Co.
Harvey, J. (1978). Modern economics (3rd ed.). The MacMillan Press Ltd., London.
 Unit 5
Factors Affecting Elasticity of
Demand
1.0 Introduction
2.0 Learning Outcomes
3.0 Learning Content
3.1 Nature of the commodity
3.2 Goods with substitutes
3.3 Variety of Uses
3.4 Proportion of Income spent on a good
4.0 Conclusion
5.0 Summary

6.0 Tutor-marked assignment

7.0 References/Further Reading
1.0 Introduction
This unit is going to take a look at the factors that determine whether a commodity will be elastic or
inelastic. They are those factors that determine how quickly or slowly consumers respond to increases or
decreases in price.

2.0 Learning Outcome

You should be able to have a good grasp of the following at the end of this unit;
i. list all the determinants of demand elasticity;
ii. explain each determinant clearly;
iii. be able to give examples of goods that have elastic demand and those with an inelastic demand.

3.0 Learning Content

3.1 Nature of the Commodity

Goods are classified into; Necessity, Comfort and Luxury goods. The nature of goods, to some extent,
determine whether a commodity will be elastic or inelastic. Necessities such as food have less elastic
demand, comforts such as milk, eggs, butter, etc. have moderate elastic demand while luxuries such as cars
or extra cars have more elastic demand.

Food stuff such as rice, which is a major staple food in this part of the world, tends to have an inelastic
demand. No matter the increase in the price of food items, consumers will still buy them because they are
a necessity for survival. They can only reduce the quantity or go for low quality or locally made ones but
they can not stop buying them completely.
Comfort goods such as milk, eggs, butter and other items in this list that are said to have moderate elastic
demand because if their prices increase, consumers can reduce their demand considerably since they are
not necessities. People can survive without comfort goods. They just add to people’s quality of life.

Having more than a car, expensive wristwatches, expensive cars, etc. are all regarded as luxury. This
category of items is therefore expected to have an elastic demand. This is because any slight increase in
the price of a luxury good, will make consumers to drastically reduce their demand for such commodity,
all things being equal. Luxury goods confer distinction on their possessors. They do not only add to
people’s quality of life, but they also uplift the status of their possessors in the society.

3.2 Substitutes
Commodities that have substitutes have more elastic demand while on the other hand, commodities with
no substitutes tend to have inelastic demand. This implies that consumers tend to respond to changes in
the price of commodities with close substitutes more easily or quickly than those commodities that do not
have close substitutes. Commodities such as meat and fish are substitutes, therefore, a change in the price
of one will affect the demand for the other. An increase in the price of meat, all things being equal, will
cause consumers to demand less for meat and increase their demand for fish.
Also, a commodity such as petrol, which has no major substitutes for now in powering cars and
engines/machines, tends to have an inelastic demand. This is because no matter the increase in the price of
petrol, consumers will have no choice than to still buy it as they do not have an alternative to it.

3.3Variety of Uses
Goods that can be put to variety of uses are also known as goods with composite demand and they are
more elastic e.g coal, milk, steel, electricity, etc. than goods that have single-use. Coal can be used for
cooking, heating and also for power generation in trains or factories. While a commodity which cannot be
put to more than one use or single-use goods tend to have a less elastic demand.

3.4 The Proportion of Income Spent on a Good

The proportion of income spent on a good also determines whether the good will have an elastic or inelastic
demand. If the proportion of income spent of a good is insignificant, then such commodity will tend to
have an inelastic demand. On the other hand, if the amount of income spent on a particular commodity is
quite significant or huge, then the said commodity will tend to be more elastic in demand.

A commodity such as salt tend to have an inelastic demand. This is because the proportion of income spent
in buying income is usually quite insignificant. If the price of salt increases, it will not impact much on its
demand. Another food item such as a bag of rice, which takes a significant proportion of a consumer’s
income, will tend to have a more elastic demand.

4.0 Conclusion
This is the concluding unit on the elasticity of demand. In this unit, we discussed some of the factors that
determine the elasticity of demand. There are numerous other factors aside these four, so you are advised
as part of self-assessment exercise to read further on this.

5.0 Summary
In this unit, we discussed the determinants of elasticity of demand. We discussed how the nature of goods,
goods with substitutes, goods with variety of uses as well as the proportion of income spent on a good will
in one way or the other determine whether a commodity will be elastic or inelastic.

6.0 Tutor Marked Assignment

i. List at least 5 determinants of elasticity of demand.
ii. Explain with goods examples any 3 of the factors listed in (i) above.

7.0 References/Further Reading

Hal, R. V. (2002). Intermediate Microeconomics: A Modern Approach. (6th ed.). New York: Norton.
Friedman, D. D. (1990). Price Theory: An Intermediate Text. South-Western Publishing Co.
Harvey, J. (1978). Modern economics (3rd ed.). The MacMillan Press Ltd., London.
 Unit 6
Definition & Determinants of Price
Elasticity of Supply
1.0 Introduction
20. Learning Outcomes

3.0 Learning Content

3.1 Definition of Price Elasticity of Supply and its Formula
3.2 Factors affecting the Price Elasticity of Supply
4.0 Conclusion
5.0 Summary

6.0 Tutor-marked assignment

7.0 References/Further Reading
1.0 Introduction
In this unit, we shall be looking at the price elasticity of supply and its determinants. Unlike the
case of elasticity of demand which has three factors of price, income and price of other commodity,
for supply, only the price of the commodity is considered hence, we have price elasticity of supply.

2.0 Learning Outcome

At the end of this unit, you should have a good knowledge of the following;
i. define in simple terms the concept of price elasticity of supply;
ii. solve any question related to price elasticity of supply;
iii. List and explain the factors that influence the price elasticity of supply.

3.0 Learning Content

3.1 Definition of Price Elasticity of Supply

Price elasticity of supply is the degree of responsiveness of quantity supplied to changes in the
price of a commodity. This can also be defined as the proportion of change in quantity supplied as
a result of a proportion of change in the price of a commodity.
The coefficient of price elasticity is symbolized by Es and is found using the formula:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 %∆𝑄𝑠

Es = =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 %∆𝑃

It should be noted that just like in the case of elasticity of demand, if the coefficient is less than 1,
supply is said to be inelastic. If the coefficient of supply elasticity is exactly equal to 1, supply is
said to be unitary. If it is greater than 1, supply is said to be elastic.

And since there is a direct and positive relationship between the price of a commodity and quantity
supplied, therefore, it is expected that the coefficient of price elasticity will always carry a positive
sign.

Numerical Example:
The price of a commodity changes from ₦1000 to ₦1600 and the quantity supplied increases from
600 to 780. What is the coefficient of price elasticity of supply?

Solution
Original quantity supplied = 600
New quantity supplied = 780

780−600 100
%∆Qs = × = 30%
600 1

Original price = ₦1000

New price = ₦1600

1600−1000 100
%∆P = ₦( )× = 60%
𝑁 1000 1

%∆𝑄𝑠 30%
∴ Es = =
%∆𝑃 60%

= 0.5
Therefore, the coefficient of price elasticity of supply is said to be inelastic because it is less than
1.

3.2 Factors Affecting Price Elasticity of Supply

i. Cost of production: if the cost of production increases very slowly in response to price
increase, supply will be elastic while in the event of a speedy increase in the cost of
production as a result of price increase, then the supply of such commodity will be
inelastic.
ii. Time lag: this implies the length of production of a commodity. The longer the time it
takes to produce a commodity, the more inelastic will be the supply of that commodity.
And the shorter the length of production, the more elastic will be the supply.
iii. Availability of markets: In reality, readily available markets, motivates producers to
easily increase production. Commodities that have markets readily and easily available
are likely to have an elastic supply while those commodities with less market
availability, have an inelastic supply.
iv. Product durability: Perishable goods have an elastic supply while durable goods have
an inelastic supply. In essence, since perishable goods have a limited shelf life and
buyers know this, since whatever has been produced has to be disposed off at the
earliest. However, when it comes to durable goods, it has been observed that the supply
is usually inelastic since producers can keep them for as long as they have to. They are
under no compulsion to sell and hence, the supply is inelastic.
v. Versatality:
vi. Contracts:

4.0 Conclusion
In this unit, we discussed how a change in the price of a commodity can affect the supply of the
commodity. A numerical example was given and solved using the percentage formula. And just
like elasticity of demand, the elasticity of supply can range from inelastic to elastic.

5.0 Summary
We defined the price elasticity of supply in detail and also gave a formula for calculating the
proportion of change in supply due to a change in price of the commodity. Factors affecting the
price elasticity of supply were also discussed. Where product durability, time lag, cost of
production and some other factors are seen to have influence on the price elasticity of supply.

6.0 Tutor Marked Assignment

i. What is price elasticity of supply?
ii. If the price of a commodity rises from $1500 to $2000 and the quantity supplied increased from
96kg to 105kg, what is the coefficient of price elasticity of supply?
iii.List and explain any 3 factors that affect the price elasticity of supply.

7.0 References/Further Reading

Hal, R. V. (2002). Intermediate Microeconomics: A Modern Approach. (6th ed.). New York:
Norton.
Friedman, D. D. (1990). Price Theory: An Intermediate Text. South-Western Publishing Co.
Harvey, J. (1978). Modern economics (3rd ed.). The MacMillan Press Ltd., London.