ECO • SHS 1Term 2WAEC / WASSCE SyllabusVIP Lesson
Elasticity of Demand and Supply
Price elasticity of demand (PED), income elasticity (YED), cross elasticity (XED), price elasticity of supply (PES), calculations, and applications.
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Real-World Context & Relevance in Ghana
Government imposes heavy excise taxes on cigarettes and alcohol because their demand is price-inelastic, ensuring high tax revenues.
Key Syllabus Learning Objectives
- 1Calculate price, income, and cross elasticity of demand using standard formulas
- 2Interpret numerical coefficients of elasticity and classify goods accordingly
- 3Advise businesses and governments on pricing and taxation policies based on elasticity
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Comprehensive Syllabus Study Notes
• Price Elasticity of Demand (PED): Measures the responsiveness of quantity demanded to a change in the price of the product.
- Formula: PED = (% Change in Quantity Demanded) / (% Change in Price).
- Degree of Elasticity:
* PED > 1: Elastic (luxuries, items with many substitutes; small price increase causes large fall in demand).
* PED < 1: Inelastic (necessities like salt, insulin, electricity; quantity changes little when price changes).
* PED = 1: Unitary elastic.
* PED = 0: Perfectly inelastic (vertical curve); PED = infinity: Perfectly elastic (horizontal curve).
• Income Elasticity of Demand (YED): Positive for normal goods; negative for inferior goods.
• Cross Elasticity of Demand (XED): Positive for substitutes (rise in price of beef increases chicken demand); negative for complements.
• Importance to Revenue: For inelastic goods, increasing price raises producer total revenue; for elastic goods, lowering price raises total revenue.
- Price Elasticity of Demand (PED): Measures the responsiveness of quantity demanded to a change in the price of the product.
- Formula: PED = (% Change in Quantity Demanded) / (% Change in Price).
- Degree of Elasticity:
- Income Elasticity of Demand (YED): Positive for normal goods; negative for inferior goods.
- Cross Elasticity of Demand (XED): Positive for substitutes (rise in price of beef increases chicken demand); negative for complements.
- Importance to Revenue: For inelastic goods, increasing price raises producer total revenue; for elastic goods, lowering price raises total revenue.
Practical Example:
Government imposes heavy excise taxes on cigarettes and alcohol because their demand is price-inelastic, ensuring high tax revenues.
Core Takeaway:
When calculating PED, ignore the negative sign (use absolute value) when classifying elasticity as elastic, inelastic, or unitary.
WAEC / WASSCE Examiner Tips
- When calculating PED, ignore the negative sign (use absolute value) when classifying elasticity as elastic, inelastic, or unitary.
Common Candidate Pitfalls & Errors to Avoid
- Reporting elasticity as a positive number without stating that the price and quantity moves were in opposite directions.
- Using the new value as the denominator where the midpoint method is required, and getting a different answer.
- Concluding demand is inelastic because total revenue rose when price fell, which is the opposite test.
- Interpreting a cross elasticity of minus 1.5 as evidence the goods are substitutes.
- Assuming agricultural supply is elastic in the short run when biological lags make it inelastic.
Topic Mastery Checklist
- Calculate price, income, and cross elasticity of demand using standard formulas
- Interpret numerical coefficients of elasticity and classify goods accordingly
- Advise businesses and governments on pricing and taxation policies based on elasticity
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