ELASTICITY

YEAR 12
OSHWAL SENIOR HIGH
MR. CHARLES KINUTHIA
 THE PRICE ELASTICITY OF DEMAND:

In the previous chapter we have discussed the movement of the quantity demanded along a
given demand curve as a result of change in the price of the good. The direction of the
movements reflects the law of demand that shows an inverse (negative) relationship between P
and Qd; the lower the price the greater the quantity demanded.

When supply increases while demand stays constant,

the equilibrium price falls and the equilibrium quantity
increases. But does the price fall by a large amount or a
little?
And does the quantity increase by large amount or a
little? The answer depends on the responsiveness of
quantity demanded to a change in price.
We have also seen in previous chapter how a change in the price of the good results in change in
quantity demanded of that good in the opposite direction (movement along the same demand curve);
and how a change in income results in a change in quantity demanded at every price. The same thing is
said about the changes in the price of related goods and other non-price determinants.

The question is now how to measure the magnitude of each change in quantity demanded or supplied as
a response to a change in one of the independent variables. The same argument can be applied to the
quantity supplied.

In order to have a better picture of the degree of responsiveness of quantity to a change in one of the
independent variable we have to understand the concept of elasticity.
THE ECONOMIC CONCEPT OF ELASTICITY
Elasticity is a measurement of the degree of responsiveness of the dependent variable to changes in any of the
independent variables.

In general elasticity is the percentage change in one variable in response to a percentage change in another variable.
ELASTICITIES OF DEMAND

This refers to the responsiveness of demand to change taking place in the market e.g. changes
in price of a product, change in price of related product or change in the income of
consumers.

With elasticity of demand, economists are concerned not only with direction of changes in
demand but also the size of the change.There are three types of elasticity of demand.
 Price elasticity of demand.
 Income elasticity of demand.
 Cross elasticity of demand.
 PRICE ELASTICITY OF DEMAND

This is a measure of degree of responsiveness of quantity of a product demanded to change in its

price. Demand of a product can either be elastic or inelastic

ELASTIC DEMAND (PED>1)

This occur when a small change in price leads to a more than proportionate change in quantity
demanded. Demand in this case is said to be more responsive to the price.

INELASTIC DEMAND (PED<1)

This occur when a big change in price leads to a less than proportionate change in quantity
demanded. Demand in this case is said to be less responsive to change in price.
Price elasticity of demand (PED) is an economic measure that is used to measures the degree of
responsiveness of the quantity demanded of a good to a change in its price, when all other influences on
buyers’ plans remain the same.
The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the
percentage change in price.
𝑄 𝑛𝑒𝑤 − 𝑄 𝑜𝑙𝑑
%∆𝑄𝑑 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = × 100
PED = 𝑄 𝑜𝑙𝑑
%∆𝑃

𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝑥 100%
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

∆𝑄𝑑 ∆𝑃 ∆𝑄𝑑 𝑃 𝑁𝑒𝑤 𝑄 − 𝑂𝑙𝑑 𝑄 𝑂𝑙𝑑 𝑃

PED = ÷ 𝑂𝑅 × 𝑃𝐸𝐷 = ×
𝑄𝑑 𝑃 𝑄𝑑 ∆𝑃 𝑂𝑙𝑑 𝑄 𝑁𝑒𝑤 𝑃 − 𝑂𝑙𝑑 𝑃
For example. The price of bread in school canteen increased from Sh. 20 to Sh. 30 and this led
to a decline of loaves demand from 10,000 to 2,000

%∆𝑄𝑑 where 𝑄 𝑛𝑒𝑤 − 𝑄 𝑜𝑙𝑑

𝐸𝑑 = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = × 100
%∆𝑃 𝑄 𝑜𝑙𝑑

Please note:

Use below alternative formulae and your

− 80% answer MUST BE -1.6
=
50% ∆𝑸𝒅 ∆𝑷 ∆𝑸𝒅 𝑷
𝑷𝑬𝑫 = ÷ 𝑶𝑹 ×
𝑸𝒅 𝑷 𝑸𝒅 ∆𝑷
= - 1.6
N.B
The formula yields a negative value, because price and quantity move in opposite directions
(law of demand). But it is the magnitude, or absolute value, of the measure that reveals
how responsive the quantity change has been to a price change. Thus, we ignore the minus
(negative) sign and use the absolute value because it simply represents the negative relationship
between Price and Quantity demanded
CATEGORIES OF DEMAND ELASTICITY
Using absolute value of Ed, we differentiate between five categories of elasticity that range
between zero and infinity.

1. Relatively Elastic Demand (Ed > 1)

%∆𝑄𝑑
If 𝐸𝑑 = > 1 ⇒ % ∆Qd > % ∆P ⇒ demand is elastic.
%∆𝑃

Consumers are very responsive to changes in Price. Demand curve is flatter ⇒ 1% change
in Price results in a more than 1% change in Quantity demanded (in the opposite direction).
(if Ed = 2 that means if Price increases by 10% Quantity demanded will decrease by 20%.)

Examples of elastic goods: cars, furniture, vacations, etc.

2. Relatively Inelastic Demand (Ed < 1)
%∆𝑄𝑑
If 𝐸𝑑 = = < 1 ⇒ % ∆Qd < % ∆P ⇒ demand is inelastic.
%∆𝑃

Consumers are not very responsive to changes in Price. Demand Curve is steeper ⇒ 1% increase
(or decreases ) in Price results in a less than 1% decreases (or increases ) in Quantity demanded (if
Ed = 0.70 that means if Price increased by 1% Quantity demanded decreases by 0.7%.) or (if Price
increased by 10% Quantity demanded decreases by 7%.)

Examples of inelastic goods: medicine, food, etc.

NB
If the price elasticity is between 0 and 1, demand is inelastic.
3. Unitary Elastic Demand (Ed = 1)
%∆𝑄𝑑
If 𝐸𝑑 = = 1 ⇒ % ∆Qd = % ∆P ⇒ demand is unit-
%∆𝑃
elastic

1% increase in Price results in a 1% decrease in Quantity

demanded
4. Perfectly Elastic Demand (Ed = ∞)
%∆𝑄𝑑
If 𝐸𝑑 = = ∞ ⇒ demand is perfectly elastic.
%∆𝑃
Horizontal demand curve shows that same price is charged
regardless of Quantity demanded (perfect competition).

Any price increase would cause demand to fall to zero.

Shifts in supply curve results in no change in price.

Examples:
Identical products sold side by side, agricultural products,
foreign exchange market and internet related
industries.
 5. Perfectly Inelastic Demand (Ed = 0)
%∆𝑄𝑑
If 𝐸𝑑 = = 0 ⇒ demand is perfectly inelastic.
%∆𝑃

In a vertical demand curve, demand is said to be

completely inelastic. Quantity demanded remains the
same (demand is total unresponsive to changes in
price) regardless of any change in price. Shifts in supply
curve results in no change in Quantity demanded.

Examples:
Medicine of heart diseases or diabetes such as insulin.
A good with a vertical demand curve has a demand
with zero elasticity.

We conclude from the five categories above that the more flatter is the demand curve the more
elastic is the demand and the more steeper is the demand curve the more inelastic is the demand
ELASTICITY ALONG STRAIGHT LINE DEMAND CURVE

Elasticity along straight line demand curve

∆𝑃
𝑆𝑙𝑜𝑝𝑒 =
∆𝑄𝑑
%∆𝑄𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦: 𝐸𝑑 =
%∆𝑃
For a straight-line (linear) demand curve the slope is constant (i.e., the slope is the same at
every point along the curve). It is equal to the change in price over the change in quantity
demanded.
Although the slope is constant, price elasticity varies along a linear demand curve.

1. When P = 0, Ed = 0 (perfectly inelastic)

2. When Q = 0, Ed = ∞ (perfectly elastic)

3. Ed increases as we move upward along a

straight-line demand curve (from the inelastic
range to the elastic one) (as P ↑ and Q↓)

4. Ed decreases as we move downward along the

straight-line demand curve (as P↓ and Q↑).
Thus, along downward sloping demand curve, demand is elastic when price is high, inelastic when
price is low and unit-elastic at the midpoint of the demand curve.

NB
Demand curve of a firm is also its Average Revenue Curve (Total Revenue ÷ Total Output)
Example: The table below shows quantity of product demanded at different price levels. On the table,
TR = P x QTY and AR= Total Revenue ÷ Total Output.

Price (£) Quantity demanded Total revenue Average revenue

(units) (TR) (AR)
8 2 16 8
7 3 21 7
6 4 24 6
5 5 25 5
4 6 24 4
3 7 21 3
2 8 16 2
We can construct demand curve/average revenue curve form the above data as shown below:

So long as PED of a product is ELASTIC , the firm can

afford to lower its prices because the total product
demanded will rise hence increasing total revenue and
profit for the firm. Conversely, if the firm increases its
price, then the demand will fall significantly thus,
lowering its revenue and profits.

When PED of the product is inelastic, increasing

prices will be beneficial for the firm as the demand will
be less responsive to the increase in price hence, the
firm can still earn high total revenue and profits. On
the other hand, lowering the prices will not bring
forth more revenue since demand will be less
responsive to fall in price. It will not therefore be
beneficial to the firm to lower its prices.
 PRICING STRATEGY

Pricing Strategy: The Relationship between P, Ed, and TR

Managers of profit maximizing firms are usually concern with the best pricing
strategy. There is a relationship between the price elasticity of demand and revenue
received.

Total revenue (TR) equals the total amount of money a firm receives from the sales of
its product

TR = P X Q.
 TR is affected by changes in both P and Qd. But as we know by now the law of demand implies
that an increase in P will result in a decrease in Qd. Thus, an increase in P may or may not lead
to greater TR. This depends on which effect is the largest, price effect or the effect of quantity
demanded. The size of the price elasticity of demand coefficient, tells us which of these two
effects is largest.

 If demand is elastic (Ed >1) ⇒ % ∆Qd > % ∆P

 10 % increase in P results in more than 10 % decrease in sales ⇒ TR decreases.

 10 % decrease in P results in more than 10 % increase in sales ⇒ TR increases

 If demand is inelastic (Ed <1) ⇒ % ∆Qd < % ∆P

 10 % increase in P results in less than 10 % decrease in sales ⇒ TR increases

 10 % decrease in P results in less than 10 % increase in sales ⇒ TR decreases
  If demand is unit elastic (Ed =1) ⇒ % ∆Qd = % ∆P

 10 % increase in Price results in 10 % decrease in sales ⇒ TR does not change

 10 % decreases in Price results in 10 % increase in sales ⇒ TR does not change

N.B
In order to increase total revenues, the manager should increase prices of products
that have inelastic demands, and should reduce prices of products that have elastic
demands.
FACTORS INFLUENCING PRICE ELASTICITY OF DEMAND

 Availability of close substitute. Products which have many close substitutes have a relative
elastic demand while those that do not have close substitute exhibit relative inelastic demand
e.g. a rise in price of Nissan cars may lead to a more than proportionate fall in their quantity
demanded as customers switch their demand to substitute like Toyota cars. Similarly the
demand for a particular brand of cigarettes will be elastic because there are several other
brands which are close substitute. However the total demand for cigarettes will be inelastic as
there is no close substitute for cigarettes.

 Whether a product is a necessity or a luxury. Demand for necessities tend to be relative

inelastic while that of luxury is relative elastic. In case of necessities like food, people need
the product and so a rise in price will not affect demand much. However people can do
without luxury so arise in their prices will cause a significant fall in quantity demanded.
 Proportion of income spent on a product. If the proportion of income spent is small e.g. salt
then even a substantial change in price may cause little change in quantity demanded (i.e. low
PED) products that take up a large proportion of income e.g. air travel experiences a sharp fall
in demand when their price rise because many consumers will no longer be able to afford
them.

 Habit forming (addictive) product. Some products are habit forming e.g. cigarettes, alcohol
and chocolate. Demand for such product will tend to be inelastic. However how much price
may rise, consumers of these products still buy them because they feel that they cannot do
without them.

 Time period. For most product, demand is inelastic in the short run than in the long run. This
is because the short run many be too short for customers to adjust to the price changes. But in
the long run some adjustment can be done as consumers seek alternatives.
 Products whose use can be postponed. If it is possible to postpone the purchase of a
product e.g. a dishwasher, demand will tend to be elastic.

 Brand loyalty. Brand loyalty reduces sensitivity to price changes and reduces PED.
Consumers will continue buying the product due to brand loyalty despite a rise in its price.

Importance of PED to the firms and government

There are several reason why firms gather information about the PED of its products. A firm
will know much more about its internal operations and product costs than it will do about its
external environment. Therefore, gathering data on how customers respond to changes in
price can help reduce risk and uncertainty. More specifically, knowledge of PED can help the
firm forecast its sales and set its price.
 Sales forecasting. The firm can forecast the impact of a change in price on its sales volume
(total revenue). For example, if PED for a product is (-)2, a 10% reduction in price (say, from £10
to £9) will lead to a 20% increase in sales (say from 1000 to 1200). In this case, revenue will rise
from £10,000 to £10,800

 Pricing policy. Knowing PED helps the firm decide whether to raise or lower prices, or
whether to price discriminate. Price discrimination is a policy of charging consumers different
prices for the same product. If demand is elastic, revenue is gained by reducing price, but if
demand is inelastic, revenue is gained by raising price.

 Non-pricing policy. When PED is highly elastic, the firm can use advertising and other
promotional techniques to reduce elasticity.
PED is also important to the government in terms of understanding the burden or incidence of
taxation on producers and consumers. The more the price inelastic the good is, a greater proportion
of tax (sale tax) is paid by the consumers than the producers.
INCOME ELASTICITY OF DEMAND

The income has an impact upon demand.

Recall that the relationship between income and demand may be direct or inverse, depending
on whether the good is a normal good or an inferior good.
Income Elasticity of Demand (YED) measures the responsiveness of Quantity demanded of a
good due to change in income. It is the percentage change in quantity demanded divided by
percentage change in income.
%∆𝑄𝑑
YED =
%∆𝑌
∆𝑄 ∆𝑌 𝑌 ∆𝑄 ∆𝑄 𝑌
𝑜𝑟 = × 𝑂𝑅 ×
The alternative formulae : 𝑌ED =
𝑄
÷
𝑌 𝑄 ∆𝑌 𝑄 ∆𝑌
EXAMPLE 1:

A consumer’s demand for a commodity when his income is Sh. 100, is 20 units. If his
income changes to Sh. 150, the demand for the commodity changes to 40 units. The
income elasticity of demand will be calculated as follows.
∆𝑄 ∆𝑌
YED = ÷
𝑄 𝑌
40 − 20 150 − 100
Use alternative formulae
YED = ÷
20 100
%∆𝑸𝒅
20 50 𝐘𝐄𝐃 = = +2
YED = ÷ %∆𝒀
20 100

20 100
YED = ×
20 50

=+2
 Assignment 1:

Income elasticity of demand

Original New quantity Original income New income ∆𝑄 𝑌 Numerical
×
quantity demanded £ 𝑄 ∆𝑌 value
demanded
20 25 16 18
100 200 20 25
50 40 25 30
60 60 80 75
60 40 27 30

In economics we use the term ‘elastic’ and ‘inelastic’ with reference to income elasticity,
demand is income inelastic if it lies between +1 and -1. if income elasticity of demand is
greater than +1 or less than -1, then it is elastic.
YED > 1 ⇒ Demand is income elastic and the good is normal and luxury. % ∆ Qd > % ∆ Y (A small
percentage change in income results in a large percentage change in Qd)

0 < YED < 1 ⇒ Demand is income inelastic and the good is normal and necessary. % ∆Qd < % ∆Y (A
large percentage change in income results in a small percentage change in Qd)

YED < 0 (negative) ⇒ the good is an inferior good.

HOME WORK:

Original New
Quantity demanded Income Quantity demanded Income
a) 100 10 120 14
b) 15 6 20 7
c) 50 25 40 35
d) 12 100 15 125
e) 200 10 250 11
f) 25 20 30 18
EXAMPLE 2:
The manager of Global Food Inc heard the news that government plans to give a 15% raise to all its employees who
represent 70% of the labor force of the country. If the estimated income elasticity of demand for global food products
is 0.85, find the expected change in the demand for the firm products.

% ∆𝑌 = 15% X 70% =10.5%

%∆𝑄𝑑
𝐸𝑦 =
%∆𝑌

%∆𝑄𝑑
0.85 =
10.5

%∆𝑄𝑑 = 10.5 X 0.85 = 8.9%

EXAMPLE 3:

If people’s average income increased from £300 to £350 per month and as
a result their purchase of orange juice increased from 5000 liters to 5800
liters per month, Calculate Income Elasticity of Demand (YED)

YED = 0.96.

The increase in income by 10% results in an increase in the Qd of orange

juice by 9.6% .Orange juice is a normal, necessary good. People buy more
of it when their income increases.
EXAMPLE 4:

If people’s average income increased from £ 300 to £ 350 per month and as a
result their purchase of used mobiles decreased from 400 units to 300 units per
month, Calculate Ey

Ey = - 1.86.

The increase in income by 10% results in a decrease in the Qd of used mobiles

by 18.6%. Since the sign is negative this means the mobile is an inferior good.
People buy less of it when their income increases.
N.B
 CROSS ELASTICITY OF DEMAND

The decision to buy a good depends not only on its price but also on the price and availability of
other goods (substitutes or complements).
We know that as the price of related good changes, the demand for the good will also change.
What we want to know here is how much will quantity demanded rise or fall as the price of the
related good changes. That is, how elastic is the demand curve in response to changes in prices of
related goods.

Cross elasticity measures the responsiveness of Quantity demanded of a particular good to

changes in the prices of its substitutes and its complements.

If X and Y are two goods, the cross elasticity of demand is the percentage change in Quantity
demanded of good X to the percentage change in price of good Y
Formulae:

%∆𝑄𝑑𝑥
𝑋. 𝐸. 𝐷 =
%∆𝑃 𝑦

∆𝑄𝑥 ∆𝑃 𝑦 𝑃 𝑦 ∆𝑄 𝑥
Alternative formulae is: 𝐶𝑟𝑜𝑠𝑠 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑥 = ÷ 𝑂𝑅 ×
𝑄𝑥 𝑃𝑦 𝑄 𝑥 ∆𝑃 𝑦
EXAMPLE 1:

Assume that the quantity demanded of tea changed from 50 packets to 80 packets per
week following an increase in price of coffee from £100 to £150 per packet. The cross
elasticity of tea would be calculated as follows:

80 − 50
Proportionate change in quantity demanded of tea = = 0.6
50
150 − 100
Proportionate change in price of coffee =
100
= 0.5

0.6
𝐶𝑟𝑜𝑠𝑠 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑡𝑒𝑎 (𝐶𝐸𝐷) = = +1.2
0.5
TYPES OF SUBSTITUTES

Definition of substitute goods – Substitute goods are two alternative goods

that could be used for the same purpose.
 Close Substitute Goods
If two goods are close substitutes, there will be a high cross-elasticity of
demand.
Example, if the price of Sainsbury’s flour increases 10%, demand for Hovis
flour may increase by 20%. To consumers, there is little difference between
the two goods. Therefore, the cross elasticity of demand is +2.0
Weak Substitute Goods
If goods are weak substitutes, there will be a low cross elasticity of demand.

Example, if the price of The Daily Mail increases 10%, the demand for the
Financial Times may only increase by 1%. Therefore, the cross elasticity of
demand is 0.1. These two newspapers are weak substitutes.

If the price of margarine increases by 10%, demand for butter may rise 2%.
XED = 0.2
Perfect Substitutes
Two goods are perfect substitutes if the utility consumers get from one good is
the same as another. For example a dollar from one FOREX

A dollar from one FOREX company is worth the same as getting a dollar from
a different FOREX company.

A4 paper from Office World gives the same utility as A4 paper from
WHSmiths.

Therefore, in theory, if one good was more expensive, there would be no

demand as people would buy the cheaper alternative.
 INTERPRETATION:
1) The positive coefficient of cross elasticity of demand of 1.2 shows the direct relationship
of change in quantity demanded in relation to change in price of the substitute. A negative
index would result if commodities in question are complementary.

2) The coefficient of 1.2 which is greater that 1 and less than infinite shows that the cross
elasticity of tea in relation to the price of coffee is elastic.
When the cross elasticity of demand has a positive sign, the two goods are substitute goods.
When the cross elasticity of demand has a negative sign, the two goods are complementary
goods.
When ER=0 ⇒ no relation between PX and DY
The size of cross elasticity of demand coefficient is primarily used to indicate the strength of
the relationship between the two goods in question.
 Example 2
Nissan Maxima and Toyota Camry are competing substitutes in the market for small passenger cars.
The Nissan manager would like to predict the negative effect of Toyota’s 15% discount on Camry
during Ramadhan. From previous years, Nissan manager has an estimate of the cross elasticity of 2.0
between these two brands.
Given this information, calculate the expected effect on Nissan sales of Maxima cars.
Solution
%∆𝑄𝑑𝑥
𝑋. 𝐸. 𝐷 =
%∆𝑃 𝑦

%∆𝑄𝑑 𝑀𝑎𝑥𝑖𝑚𝑎
𝑋. 𝐸. 𝐷 = INTERPRETATION.
%∆𝑃 𝑐𝑎𝑚𝑟𝑦
Maxima sales are expected to drop by 30% as a result
%∆𝑄𝑑𝑥 of Toyota discounts during Ramadhan.
2=
−15
⇒ % ∆ Maxima = 2 X (-15%) = -30%
PRICE ELASTICITY OF SUPPLY

When demand increases, the equilibrium price rises and the equilibrium quantity increases. But
does the price rise by a large or a little amount? And does the quantity increase by large or a
little amount?
The answer depends on the responsiveness of quantity supplied to a change in price.

Elasticity of supply measures the responsiveness of quantity

supplied to a change in the price of a good when all other
influences on selling plans remain the same.

PES measures the responsiveness of change in quantity

supplied to change in price.
 Formulae:
%∆𝑄𝑠 ∆𝑄𝑠 ∆𝑃 ∆𝑄𝑠 𝑃
𝐸s = or 𝐸s = ÷ 𝑂𝑅 ×
%∆𝑃 𝑄𝑠 𝑃 𝑄𝑠 ∆𝑃

Example 1:

Suppose you have the following data

Price 1 Quantity 1 Price 2 Quantity 2

20 10 30 13

%∆𝑄𝑠
𝐸s =
%∆𝑃
30%
𝑄 𝑛𝑒𝑤 − 𝑄 𝑜𝑙𝑑 = = 𝟎. 𝟔
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = × 100 50%
𝑄 𝑜𝑙𝑑
DIFFERENT RANGES OF ELASTICITY OF SUPPLY
1. If Es >1; % ∆ Qs greater than % ∆ P (if Price increases by 1%, Quantity supplied increases by more than 1%)
⇒ supply is elastic
2. If Es < 1; % ∆ Qs less than % ∆ P (if P increases by 1%,
Quantity supplied increases by less than 1%)⇒ supply is
inelastic

3. If Es = 1; % ∆ Qs equals % ∆ P (if Price increases by 1%,

Quantity supplied increases by 1%) ⇒ supply is unit elastic
4. If Es = ∞, supply is perfectly elastic with horizontal supply curve. The same price is charged regardless of Quantity
supplied . Any price decrease would cause supply to fall to zero. Shifts in demand curve results in no change in Price

5. If Es = 0, supply is perfectly inelastic with a vertical supply curve.

Quantity supplied remains the same regardless of any change in
price. Shifts in demand curve results in no change in Quantity
supplied .
 FACTORS THAT INFLUENCE ELASTICITY OF SUPPLY
 Ability to store the product. Supply will be elastic if the product can be stored. If the price rises, the
quantity offered for sale can be increased quickly and easily by drawing on stocks which have been kept
aside. If the price falls, the supply can be reduced by adding to the stock. Durable products therefore have
elastic supply whilst perishable ones have inelastic supply

 Spare capacity. Spare capacity refer to any resources employed in the firm which is not fully utilized. If the
firm has spare capacity it should be able to increase output quickly without a rise in cost and therefore the
supply will be elastic. However if the resources are fully employed, then the PES will be inelastic.

 Factor mobility. The extent to which supply is elastic depend upon the flexibility and mobility of factors of
production. The easier it is to switch the factors of production from one product to another, the higher the
PES (i.e. elastic) will tend to be. On the other hand, if factors of production are specific to a product i.e.
little use in producing anything else, even a large change in the price of the product may cause just a little
change in quantity supplied (low PES/ inelastic).
 Availability of substitutes. These are goods which producers can easily produce as alternative
e.g. one model of a car can be a good producer substitute for another model in the same range
because the car manufacturer can easily switch resources on its production line. On the other
hand carrots are not substitutes for cars. If a product has many substitutes, the producers can
quickly and easily alter the pattern of production in case price changes or falls. Thus PES will be
relatively high (elastic) and vice versa.

 Length of the production period. A production that takes long time to produce has inelastic
supply e.g. agricultural products. A product that takes a short time to produce has an elastic
supply. If price for sugar increases a farmer will not be able to immediately respond by
increasing supply, since it takes a long time for it to be ready for harvesting thus its. However, in
the long run after the period of maturity the supply will respond to changes in price thus, its
PES will be elastic.
 The time it takes to increase capacity. In the short run a firm may not be able to change its factor
inputs, so supply will be inelastic. In the long run, factor inputs can be changed (varied). A firm
has more time to adjust its production and so supply will be more elastic.

N.B: short run is the interval which must elapse before more can be supplied with the
existing capacity (resources). During this period there will be at least one variable factor
while the rest are fixed. On the other hand, long run is the time interval which is long
enough to change the quantity of all factors of production employed. In the long run
therefore, all the factors of production are variable.

 Number of firms. The more the number of firm in an industry, the more elastic supply will be.
This is because any change in price will be met by a great change in quantity supplied since there
are many firms responding to the price change. When an industry has few firms, supply tend to
be inelastic in the short run and elastic in the long run as many firms join the industry and start
supplying.