Quantity Demanded refers to a specific amount of a product that consumers are willing to buy at a particular price over a designated time period.
Percentage Change in Price Calculation:
Percentage change in price=Change in price×100Original price=(5000−4000)×1004000=1000×1004000=25%text{Percentage change in price} = frac{text{Change in price} times 100}{text{Original price}} = frac{(5000 – 4000) times 100}{4000} = frac{1000 times 100}{4000} = 25%Percentage change in price=Original priceChange in price×100=4000(5000−4000)×100=40001000×100=25%
Quantity Supplied refers to the amount of a commodity that is available in the market for sale.
Price Elasticity of Demand
Elasticity of Demand measures the degree of responsiveness of the quantity demanded of a product to a percentage change in its price.
Calculating Price Elasticity of Demand (Ed):
Ed=Percentage change in quantity demandedPercentage change in priceEd = frac{text{Percentage change in quantity demanded}}{text{Percentage change in price}}Ed=Percentage change in pricePercentage change in quantity demanded
Example Calculation: If the price of a bag of maize rises from MK4000 to MK5000, and the quantity demanded decreases from 700 bags to 400 bags, we calculate:
- Change in Quantity Demanded:
Change in demand=(700−400)×100/700=42.86 - Price Increase:
Percentage change in price=(5000−4000)×100/4000=25% - Ed Calculation:
Ed=42.86/25=1.714
Degrees of Price Elasticity of Demand
- Elastic Demand:
- Occurs when a price change results in a significant change in quantity demanded.
- Ed > 1: Prices must be competitive for effective sales.
- Unitary Demand:
- A percentage change in price results in an equal percentage change in quantity demanded.
- Ed = 1: Competing alternatives are readily available.
- Inelastic Demand:
- Quantity demanded is not significantly affected by price changes.
- Ed < 1: Price increases can lead to higher profits.
Implications of Price Elasticity of Demand
- Risk Reduction: Helps farmers make informed decisions, minimizing demand risk.
- Sales Forecasting: Allows farmers to predict the impact of price changes on sales volume and total revenue.
- Pricing Policy: Guides farmers on when to adjust prices and if price discrimination is appropriate (charging different prices to different consumers).
Price Elasticity of Supply
Price Elasticity of Supply (Es) measures the responsiveness of quantity supplied due to a change in the product’s price.
Calculating Price Elasticity of Supply (Es):
Es=Percentage change in quantity suppliedPercentage change in priceEs = frac{text{Percentage change in quantity supplied}}{text{Percentage change in price}}Es=Percentage change in pricePercentage change in quantity supplied
Example Calculation: If Mary supplied 1000 bags of beans at MK3000 each and increased her supply to 2500 bags at MK4000 each:
- Change in Quantity Supplied:
Change in quantity supplied=(2500−1000)×100/1000=150% - Price Increase:
Percentage change in price=(4000−3000)×100/3000=33.33% - Es Calculation:
Es=150/33.33=4.5
Degrees of Price Elasticity of Supply
- Elastic Supply:
- A price change results in a large change in quantity supplied.
- Es > 1.
- Unitary Supply:
- A price change leads to an equal change in quantity supplied.
- Es = 1.
- Inelastic Supply:
- A price change results in little or no change in quantity supplied.
- Es < 1.
Implications of Elasticity of Demand and Supply
- A slight price reduction can boost demand and increase supply for unitary commodities.
- Inelastic commodities tend to sell regardless of price fluctuations.
- Elastic commodities are often stored until demand rises, avoiding low-price sales.
- Government subsidies on agricultural inputs can lower prices, increasing competition.
- An increase in price for commodities with elastic demand often shifts demand to alternative products, prompting producers to increase supply of those alternatives.