ZIMSEC O Level Business Studies Notes: Marketing:Introduction to Elasticity of Demand
- Elasticity of demand to which demand for a good or service varies with its price
- It is a measure of how sensitive or how responsive is demand to changes in the price of a product
- An elastic product is a product whose demand is sensitive or responsive to changes in price
- An increase in price results in a decrease in demand
- Demand tends to be elastic if:
- The product is a luxury item which people will quickly forego if it becomes expensive
- The product has close substitutes for example tea can replace coffee if the later becomes too expensive
- If the product takes up too much of most people’s disposable incomes
- Conversely a product’s demand is likely to be inelastic if:
- The product is a neccessity e.g. mealie-meal or bread
- There are no close substitutes for example electricity or petrol
- The product is habit forming/addictive for example alcohol and tobacco
- The product is inexpensive when it comes to income for example matches
- In addition to price there are some other factors that affect demand viz:
- The income of buyers i.e. Income elasticity of demand
- The price of substitutes and complementary products
Income Elasticity of Demand
- This is the responsiveness of demand to changes in income
- People will be able to buy more luxury goods if their income increases
- However people will buy less of inferior goods (giffen goods) for example kapenta as people opt for meat instead
Cross Elasticity of Demand
- It refers to the effect on demand of one product to a change in another product
- This affects goods that have close substitutes for example:
- Tea and Coffee provided people are willing to make the switch to tea if the price of coffee increases for example
- Solar panels and mains electricity from ZESA if the price of Solar Panels people might buy more solar panels instead
- Cross elasticity also be observed in complementary products for example tea and sugar
- An increase in the price of sugar will see a fall in the price of tea
NB This is a very basic examination of the elasticity principle and no calculations are required
To access more topics go to the O Level Business Notes