EJC H2Econs Topic3

1 © Eunoia Junior College Economics Department 2025 Topic 3: Elasticities of Demand & Supply Theme 2.1 Price Mechanism and its Applications How to use this set of lecture notes? 1) BEFORE LECTURES – UNDERSTANDING CONTENT - Reference your notes against your H2 syllabus. Mark out the key concepts so that you know what you MUST know - Read your notes ahead so that you can focus on listening and capturing additional notes during lectures 2) During lectures – APPLYING CONTENT - Bring your hard copy notes along, and use your PLDs to refer to the lecture slides concurrently - Capture additional notes, especially the real-world examples where you can note down how concepts are applied and how economic analysis are developed in varying contexts - You should make use of a notetaking/consolidation tool to take notes during lessons and to consolidate your learning at timely junctures. Examples are MIRO, Notion, Goodnotes, Notability, Microsoft OneNote, KAMI, etc. The choice is yours! 3) After Lectures – TUTORIAL PREPARATION to use content flexibly to show application, analysis and evaluation skills - Revise concepts relevant for the case study and essay questions - Refer to the notes and use it flexibly to prepare your answers to meet question requirements. Pure memorisation will not work as it does not involve deep understanding. - Do share your notes with your friends to multiply learning!

2 © Eunoia Junior College Economics Department 2025 CONTENTS Introduction to Elasticities of Demand and Supply 1. Elasticity 1.1. Concept of elasticity 2. Price Elasticity of Demand (PED) 2.1. Definition 2.2. Measurement and Formula 2.3. Interpretation of sign and coefficient of PED 2.4. Determinants of PED 2.5. Application of PED to analyse market outcomes and impact on economic agents 3. Income Elasticity of Demand (YED) 3.1. Definition 3.2. Measurement and Formula 3.3. Interpretation of sign and coefficient of YED 3.4. Graphical illustration of YED 3.5. Determinants of YED 3.6. Application of YED to analyse market outcomes and impact on economic agents 4. Cross Elasticity of Demand (XED) 4.1. Definition 4.2. Measurement and Formula 4.3. Interpretation of sign and coefficient of XED 4.4. Application of XED to analyse market outcomes and impact on economic agents 5. Price Elasticity of Supply (PES) 5.1. Definition 5.2. Measurement and Formula 5.3. Interpretation of sign and coefficient of PES 5.4. Determinants of PES 5.5. Application of PES to analyse market outcomes and impact on economic agents 6. Limitations of Elasticities Concepts Summary on the Use of Elasticities Concepts Annex Essential Questions: 1. Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus. How are these outcomes affected by elasticities concepts? 2. How do economic agents make use of elasticities concepts in their decision-making?

3 © Eunoia Junior College Economics Department 2025 Introduction to Elasticities of Demand and Supply In the previous topic, we have established that price changes are due to changes in demand and/or supply. Changes in demand and supply can affect equilibrium price and quantity. In this topic, we employ the concept of elasticity to help us explain the extent of changes in price and quantity of a good or service. Furthermore, we will consider how the concept of elasticity is useful to the various economic agents. 1. Elasticity 1.1 Concept of elasticity Elasticity in economics refers to the degree of responsiveness. Within our syllabus, there are two broad categories of elasticity concepts, namely elasticity of demand and elasticity of supply. Generally, there are three elasticities of demand that economists are interested in:  Price Elasticity of Demand (PED) : refers to the degree of responsiveness of quantity demanded of a good to a given change in the price of the good itself, ceteris paribus.  Income Elasticity of Demand (YED): refers to the degree of responsiveness of demand for a good to a given change in consumers’ income, ceteris paribus.  Cross Elasticity of Demand (XED): refers to the degree of responsiveness of demand for a good to a given change in the price of a related good, ceteris paribus. Unlike the various elasticities of demand, there is only one elasticity of supply.  Price Elasticity of Supply (PES): refers to the degree of responsiveness of quantity supplied of a good to a given change in the price of the good itself , ceteris paribus. 2. Price Elasticity of Demand (PED) 2.1. Definition Price elasticity of demand (PED) refers to the degree of responsiveness of quantity demanded of a good to a change in the price of the good itself , ceteris paribus. While the law of demand tells us that when the price of a good rises, the quantity demanded for the good falls, ceteris paribus. It does not tell us the extent of the fall in quantity demanded. Therefore, what PED does is to help us determine the extent of the fall in quantity demanded in percentage terms, as a result of a price change.

4 © Eunoia Junior College Economics Department 2025 This helps us to be precise as economists; instead of saying ‘when price increases, then quantit y demanded will fall’, we can give precision to the statement by saying ‘a 1% increase in the price of the good will lead to a 10% decrease in quantity demanded’. This also means that when price of a good rises (1%), quantity demanded falls more than proportionately (10%). 2.2. Measurement and Formula Mathematically, the PED is a numerical value calculated as the percentage change in quantity demanded of a good divided by the percentage change in its own price. ܦܧܲ= %∆ݕݐ݅ݐ݊ܽݑܳ ݀݁݀݊ܽ݉݁݀ %∆݁ܿ݅ݎܲ = ∆݀ܳ ݀ܳ× 100% ∆ܲ ܲ× 100% = ∆݀ܳ ∆ܲ×ܲ ݀ܳ Where Qd = change in quantity demanded of the good P = change in price of the good Qd = original quantity demanded of the good P = original price of the good Computing the PED for Good X Graphically (and mathematically), the smaller the absolute value of PED , the less price elastic the demand, the steeper the demand curve. However, the PED value is not equal to the gradient of the slope. Refer to the Annex for information on how PED may differ along a straight line, where the gradient is constant. % change in price due to the fall in supply 50% % change in quantity demanded as a result -10% PED (-) 10% = - 0.2 50% 10 50 45 Price Quantity DD 15 0 SS1 SS0 Figure 1: Price inelastic demand

5 © Eunoia Junior College Economics Department 2025 2.3. Interpretation of sign and coefficient of PED As calculated above, the PED sign is always negative. This illustrates the Law of Demand, which explains the inverse relationship between price and quantity demanded of a good. In conventional use, we leave out the negative sign in front of the coefficient since PED is always negative. Demand for a good can be said to be price elastic or inelastic. To know whether the demand for a good is price elastic or inelastic, we look at the coefficient of the PED. The coefficient of PED lies between 0 and infinity. The higher the magnitude of coefficient of PED, the more price elastic is the demand for the good. This means that quantity demanded is more responsive to changes in the price of the good. Coefficient Meaning Graphical Representation |PED| >1 Demand is price elastic. A given % change in price of a good will result in a more than proportionate change in quantity demanded, ceteris paribus . This means that consumers are price sensitive and more responsive to price changes. e.g. |PED| = 4 A 1% increase in price of a good will lead to a 4% fall in quantity demanded. Example: Air -tra