Elasticity of Demand and Supply
Elasticity measures responsiveness and is examined through price, income and cross elasticities of demand, plus price elasticity of supply. GCE questions test formula use, interpretation and the link to revenue, tax incidence and business decisions.
Price elasticity of demand
PED = percentage change in quantity demanded ÷ percentage change in price. Use the initial values unless told otherwise, and ignore the negative sign when judging size. Demand is elastic if |PED| > 1, inelastic if < 1, unit elastic if = 1. Determinants include substitutes, necessity, share of income, time and habit. If demand is elastic, a price rise reduces total revenue; if inelastic, a price rise increases revenue.
Income and cross elasticity
YED = %ΔQd ÷ %Δincome. Positive means normal; negative means inferior; greater than 1 suggests a luxury. XED = %ΔQd of good A ÷ %Δprice of good B. Positive means substitutes; negative means complements; zero means independent.
Price elasticity of supply
PES = %ΔQs ÷ %ΔP. Supply is more elastic when firms can respond quickly, hold stocks, move factors easily, or when the time period is longer. In the short run, agricultural supply is often inelastic.
Worked example
Rice price rises from 10,000 to 12,000 CFA per bag; quantity demanded falls from 500 to 350 bags. %ΔQ = (350 − 500)/500 × 100 = −30%. %ΔP = (12,000 − 10,000)/10,000 × 100 = +20%. PED = −30/20 = −1.5, so demand is elastic. Revenue before = 10,000 × 500 = 5,000,000 CFA; after = 12,000 × 350 = 4,200,000 CFA. The price rise cuts revenue, as expected with elastic demand. If income rises 10% and chicken demand rises 15%, YED = 1.5, a normal luxury.
Traps that cost marks
Do not use absolute changes instead of percentage changes; do not drop the negative sign when classifying complements or substitutes via XED; do not assume elasticity is the same all along a straight-line demand curve; and do not say a tax always falls on consumers. The more inelastic side of the market bears more of an indirect tax.