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:
    1. The product is a luxury item which people will quickly forego if it becomes expensive
    2. The product has close substitutes for example tea can replace coffee if the later becomes too expensive
    3. If the product takes up too much of most people’s disposable incomes
  • Conversely a product’s demand is likely to be inelastic if:
    1. The product is a neccessity e.g. mealie-meal or bread
    2. There are no close substitutes for example electricity or petrol
    3. The product is habit forming/addictive for example alcohol and tobacco
    4. 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