Demand for Goods and Services

Welcome to Year Three! Economics gets even more exciting as you begin to see how it helps solve real-life problems faced by families, businesses, communities and the nation. In this section, you will explore the elasticity of demand, which is how buyers respond to changes in prices, incomes or the prices of related goods. You will learn how to calculate price, income and cross elasticity, understand the factors that influence them and see how this knowledge is used by producers, consumers and governments to make decisions. This builds on what you already know. In your earlier studies, you discovered the meaning of demand, the law of demand and its types. You also examined what affects demand and how to differentiate between a change in demand and a change in quantity demanded. Now, you will use these ideas to understand how demand changes and why it matters in everyday economic choices.

KEY IDEAS

• Cross elasticity of demand explains how the demand for one product responds when the price of a related product (like a substitute or complement) changes.

• Elasticity of demand is a useful tool for producers and governments. It helps them decide how to set prices, plan production or introduce policies like taxes and subsidies based on how consumers react.

• Elasticity of demand measures how sensitive the quantity demanded is to changes in price, consumer income or the price of related goods. It tells us how strongly buyers respond to economic changes.

• Income elasticity shows how the demand for a product changes when consumers’ income increases or decreases.

• Several factors influence elasticity, including how easily consumers can switch to other products, whether the good is a necessity or a luxury and how much time they have to adjust to price changes.

Introduction to Elasticity of Demand

Elasticity of demand measures how the quantity demanded of a commodity changes when there is a change in the determinants of demand, such as the price of the commodity itself, income, and the prices of related goods. It is also defined as the degree of responsiveness of quantity demanded to changes in determinants of demand, such as the price of the commodity itself, income, and the prices of related goods.

The knowledge of elasticity of demand helps traders, shoppers and government officials to make better decisions about prices, taxes and how to use resources.

Types of Elasticity of Demand

₁. Price Elasticity of Demand (PED) This measures the responsiveness of the quantity demanded of a commodity to a change in price of the commodity itself. If the price of tomatoes goes up in the market, do people buy less or buy more?

2. Income Elasticity of Demand (YED)

This measure how the quantity demanded of a commodity changes when income changes. That is, when the consumer’s income increases or decreases, he or she may buy more or less, depending on the type of commodity. If salaries increase in Ghana, will consumers buy more rice? Why?

3. Cross Elasticity of Demand (XED)

This measures how the demand for one commodity (commodity A) changes when the price of another commodity (commodity B) changes. This happens when the goods are substitutes or complements. If the price of Coca-Cola increases, will consumers buy more or less of Fanta? Why?

Types of Price Elasticity of Demand

The responsiveness of quantity demanded to change in price can be put into five types and these are determined by the numerical values (coefficient of elasticity).

1. Relatively Elastic Demand (PED > 1) This occurs when a small percentage change in price results in a bigger percentage change in quantity demanded. This means that the price elasticity of demand is greater than one. This type of commodity has many close substitutes. It is also known as fairly elastic demand.

Example: A 10% increase in the price of a Samsung phone may result in a 20% drop in the number of people buying it. People have other options, so they can easily switch to another phone or brand.

2. Relatively Inelastic Demand (PED < 1) This is where a proportionate change in price results in a less than proportionate change in quantity demanded. It is also known as fairly inelastic demand.

Example: If transport fares have increased by 15% and as a result, commuters have only reduced the number of times they take a trotro by 5%, then demand is inelastic. This is because commuters cannot completely do away with taking a trotro.

3. Perfectly Elastic Demand (PED = ∞) Perfectly elastic demand occurs when consumers are willing to buy any quantity of a good only at a specific fixed price. If the price increases even slightly, the quantity demanded falls to zero. This situation usually exists where there are many perfect or close substitutes for the good. In this case, the coefficient of price elasticity of demand (PED) is equal to infinity (∞). Example: In a Ghanaian competitive market for bottled water, where they are sold at a fixed price. If the price of Voltic water increases slightly, buyers will switch to other brands like Awake drinking water.

4. Perfectly Inelastic Demand (PED = 0) This is when the quantity consumers buy does not change at all, no matter how much the price changes. This happens when the good is a necessity or has no close substitutes. The numerical value is equal to zero. Example: A patient with high blood pressure (BP) will buy BP drugs no matter the price because it becomes necessary for his or her survival.

5. Unitary Elastic Demand (PED = 1) This is when a percentage change in price results in the same or equal percentage change in quantity demanded.

Example: If the price of a bag of maize increases by 5% and as a result, the quantity demanded decreases by 5%, then the percentage change in price is equal to the percentage change in quantity demanded. This means the price elasticity of demand (PED) is equal to 1. In this case, the total revenue of the seller remains unchanged despite the change in price.

Activity 1.1 Revision Activity on Demand

Purpose of the Activity: This activity helps you to revise and apply your knowledge of demand concepts by analysing how various factors affect consumer demand in a familiar Ghanaian context.

Materials Needed: Notebook or exercise book and Pencil or pen Instructions Work in pairs (mix genders where possible) You will read the scenario together and discuss your answers Also, write your responses in your notebook Be prepared to share your findings with the class Scenario: Read this scenario carefully and perform the tasks that follow.

Kofi’s Pure Water Business at Tema Station

Kofi sells pure water (ice water) at Tema Station. He has observed the following over the past year:

When he sold at 50Gp per sachet, he sold 200 sachets daily. When he increased to 80Gp, sales dropped to 120 sachets daily. During the hot season (March-April), even at 80Gp, he sells 300 sachets daily.

When workers received salary increases, sales jumped to 250 sachets at the same price. Students buy less during school holidays but more during exam periods. When Fan Ice Yoghurt reduced its price, Kofi’s afternoon sales decreased. Kofi also realised that people still buy pure water even when prices rise because they need it to quench their thirst.

Answer these questions.

1. Using Kofi’s business situation, create your simple definition of demand and show how his sales pattern demonstrates the law of demand.

2. Investigate the scenario and identify THREE non-price factors that influenced Kofi’s sales. For each factor, explain how it affected his business using evidence from the scenario.

3. Examine the scenario and find:

a. One situation where customers moved along Kofi’s demand curve

b. One situation where Kofi’s entire demand curve shifted.

c. Compare the two situations in a and b and explain what makes them different.

4. Analyse the statement “people still buy pure water even when prices rise because they need it.” What does this reveal about how sensitive customers are to price changes for pure water? Support your analysis with reasoning.

5. Imagine you are Kofi’s business consultant. Based on your analysis of his sales patterns, recommend two strategic times when he should adjust his pricing and explain your economic reasoning for each recommendation.

Summary for learners:

Understanding demand helps explain why businesses succeed or struggle in different situations and seasons.

Activity 1.2 Elasticity Detective - Ghanaian Market Analysis Purpose of the Activity: This activity helps you identify and classify different types of price elasticity of demand by analysing how Ghanaian consumers respond to price changes for various goods and services.

Instructions

1. Work in pairs (mix genders where possible)

2. Read each market scenario carefully

3. Discuss and analyse the consumer behaviour described

4. Complete the tasks in your notebook Market Scenarios Scenario A: When petrol prices increased by 20% last month, most drivers still bought almost the same amount because they needed fuel for their daily transport.

Scenario B: When Auntie Mansa increased her waakye price by 10%, her sales dropped by 15% as customers switched to other food vendors nearby.

Scenario C: Dr Mensah’s patients continue buying their prescribed malaria medication even when pharmacy prices doubled during shortages.

Scenario D: When MTN reduced call rates by 25%, customer usage increased by exactly 25%, keeping their total spending the same.

Scenario E: In the international gold market, if Ghana tries to sell gold above the world price, buyers will completely stop purchasing from Ghana and buy from other countries instead.

Answer these questions

1. Sensitivity Analysis: For each scenario (A-E), determine how sensitive consumers are to price changes. Classify each as:

a. Very sensitive to price changes

b. Somewhat sensitive to price changes

c. Not sensitive to price changes at all

2. Elasticity Classification: Match each scenario to the correct type of elasticity:

a. Perfectly Elastic Demand

b. Relatively Elastic Demand

c. Unitary Elastic Demand

d. Relatively Inelastic Demand

e. Perfectly Inelastic Demand Create this table in your notebook and use it to answer 2.

Scenario Type of Elasticity Reason for Classification

A (Petrol) B (Waakye) C (Medicine) D (Phone calls) E (Gold market)

3. Real-Life Application: Think of TWO goods or services in your community and predict their elasticity type. Explain your reasoning based on how people in your area typically respond to price changes.

Good/Service 1: ………………………… Reason: …………………………………………… Good/Service 2: ………………………… Reason: ……………………………..…………….

4. Business Implications: Choose one scenario from A to E and advise the business owner: Should they increase or decrease prices to earn more revenue? Explain your recommendation using elasticity concepts.

5. Peer Review: Exchange notebooks with another pair. Check their classifications and suggest improvements or alternative explanations where appropriate.

Summary: Understanding elasticity helps predict how consumers will react to price changes and guides business pricing decisions.

Price Elasticity of Demand (PED) tells about the degree to which the quantity demanded of a product changes when its price changes. We use a formula to calculate this value to show how sensitive consumers are to price changes.

By calculating price elasticity, we know whether a good is elastic, inelastic or unitary, which tells us how consumers react or respond to price changes. For example, a tomato seller at the Kaneshie Market can use the concept of elasticity to determine if increasing prices will reduce sales or not.

Price Elasticity of Demand (PED): The ratio of the percentage change in quantity demanded to the percentage change in price.

Percentage Formula: PED = (% Change in Quantity Demanded) ÷ (% Change in Price) PEH %∆Q [% Change in quantity demanded] %∆P [% change in price] = =

Example 1

If the price of a pack of standard bottled water increases from GH₵40 to GH₵50 and the quantity demanded decreases from 500 packs to 450 packs, calculate the Price Elasticity of Demand (PED) using the percentage change formula.

Solution

Step 1: Identifying the components Old Price: GH₵40 New Price: GH₵50 Old quantity: 500 packs New quantity: 450 packs

Step 2: Percentage change in quantity demanded:

450-500 100 -50 500500 X = =100 -10%X

Step 3. Percentage change in price 50-40 100 10 4040 X = =100 25%X

Step 4: Substituting the values for PED PED -10% 25% = == =-0.4 |-0.4| 0.4 We take the absolute value |-0.4| , so PED = 0.4 Interpretation: Since PED < 1, demand is inelastic.

This means consumers are not very responsive to price changes. In this case, a 25% increase in price caused only a 10% fall in quantity demanded, so the seller could make more revenue even when the number of packs sold decreased.

Example 2

If the price of a pack of standard bottled water increases by 25% from an initial price of GH₵40 and the quantity demanded decreases by 50 packs from an initial quantity of 500 packs, calculate the Price Elasticity of Demand (PED) using the percentage change formula.

Solution

Step 1: Identifying the components Old Price: GH₵40 New Price: This will be the GH₵40 plus 25% of GH₵40 25 100 =40 GH₵10X , Thus 40 + 10 = GH₵50 Old quantity: 500 packs New quantity: 500 minus 50 = 500 – 50 = 450 packs

Step 2: Percentage change in quantity demanded

-50450-500 500100 == 100100 -10%XX

Step 3: Percentage change in price The percentage change in price has already been given in the question, i.e. 25%

Step 4: Substituting the values for PED PED -10% 25% = == =-0.4 |-0.4| 0.4 We take the absolute value |-0.4|, so PED = 0.4 Interpretation: Since PED < 1, demand is inelastic.

This means consumers are not very responsive to price changes. In this case, a 25% increase in price caused only a 10% fall in quantity demanded, so the seller could make more revenue even when the number of packs sold decreased.

Example 3

If the price of a pack of premium bottled water increases by 20% from an initial price of GH₵50 and the quantity demanded decreases by 150 packs from an initial quantity of 400 packs, calculate the Price Elasticity of Demand (PED) using the percentage change formula.

Solution

Step 1: Identifying the components Old Price: GH₵50 New Price: This will be the GH₵50 plus 20% of GH₵50 20 100 =50 GH₵10X , Thus 50 + 10 = GH₵60 Old quantity: 400 packs New quantity: 400 minus 150 = 400 – 150 = 250 packs

Step 2: Percentage change in quantity demanded

-150250-400 400400 == 100100 -37.5%XX

Step 3: Percentage change in price The percentage change in price has already been given in the question, i.e., 20%

Step 4: Substituting the values for PED

-37.5 20 =−1.875 = ∣−1.875∣ = 1.875 We take the absolute value ∣−1.875∣, so PED = 1.875 Interpretation: Since PED > 1, demand is elastic. This means consumers are very responsive to price changes. In this case, a 20% increase in price caused a 37.5% fall in quantity demanded, so the seller would lose revenue when prices increase. Premium bottled water has many substitutes (regular water, other beverages), making consumers sensitive to price changes.

Midpoint formula The midpoint formula uses the average of the old and new values to calculate percentage changes. This formula gives you the same numerical value whether you calculate from:

Price increasing from GH₵10 to GH₵20 or Price decreasing from GH₵20 to GH₵10 PED = [(Q₂-Q₁)/((Q₁+Q₂)/2)] ÷ [(P₂-P₁)/((P₁+P₂)/2)] PED = [(Q₂-Q₁)/( (Q2+Q1)/2 [(P₂-P₁)/( (P2+P1)/2 )] OR PED = [(Q₂-Q₁)/(Q₁+Q₂) [(P₂-P₁)/(P₁+P₂)] (the 2 cancels out)

Example 4

The price of a bag of local rice increases from GH₵300 to GH₵400 and the quantity demanded falls from 400 bags to 300 bags. Use the midpoint formula to calculate the price elasticity of demand and interpret your answer.

Solution

PED = [(300-400)/(300+400)/2] [(400-300)/(400+300)/2] PED =[-100/350] [100/350] = -1 = | -1| = 1 We take the absolute value, so PED = 1 Interpretation: A PED of 1 means unitary elasticity. This implies that the percentage change in quantity demanded is exactly equal to the percentage change in price. When PED = 1 (unitary elasticity), total revenue (income) remains the same.

Activity 1.3 PED Calculator - Analysing Ghanaian Business Decisions

1. Work in pairs (mix genders where possible)

2. Follow each step-by-step

3. Show all your working clearly in your notebook

4. Discuss your findings with your partner Business Scenario: Read this scenario carefully and perform the tasks that follow.

Mama Adjoa’s Kelewele Stand

Mama Adjoa sells kelewele at Kaneshie Market. Last month, she increased her price by GH₵3 from an initial price of GH₵5 per cup, due to the rising cost of plantain. In effect, her daily sales dropped by 37.5% from an initial sale of 80 cups.

Answer these questions

1. In your notebook, write the two PED formulas you will use:

Percentage Formula: PED = _________________ Midpoint Formula: PED = ___________________

2. Create a table like this and fill in Mama Adjoa’s data:

Variable Original (P₁, Q₁) New (P₂, Q₂)

Price per cup Quantity sold daily

Note: To get Mama Adjoa’s New quantity, you will find the percentage drop, thus, 37.5% of 80.

3. Calculate PED using the Percentage Method: Complete this working

table:

Calculation Steps Show your working here Answer % Change in Quantity = (Q₂-Q₁)/Q₁ × 100 % Change in Price = (P₂-P₁)/P₁ × 100 PED = % Change in Qty ÷ % Change in Price Absolute Value of PED

4. Calculate PED using the Midpoint Method Complete this working table Calculation Steps Show your working here Answer Midpoint Quantity = (Q₁ + Q₂) ÷ 2 Midpoint Price = (P₁ + P₂) ÷ 2 Change in Quantity = (Q₂ - Q₁) Change in Price = (P₂ - P₁) PED = (Change in Qty ÷ Midpoint Qty) ÷ (Change in Price ÷ Midpoint Price) Absolute Value of PED

5. Based on your PED calculations, answer these questions:

a. Is demand for Mama Adjoa’s kelewele elastic, inelastic or unitary elastic?

b. Did Mama Adjoa’s total daily revenue increase or decrease after the price change? Show your calculation.

c. Should Mama Adjoa keep the new price or return to the old price?

Explain your reasoning using the PED results.

6. Exchange notebooks with another pair and;

a. Check their calculations for accuracy

b. Suggest any one improvement or correction Summary: PED calculations help business owners predict how price changes will affect their sales and revenue, enabling smarter pricing decisions.

When PED is greater than 1: elastic; less than 1: inelastic; exactly 1: unitary.

Welcome back to studies! As Ghana’s economy grows and people earn higher incomes, their buying habits change. Businesses, individuals and the government can use the information derived from elasticity concepts to make better decisions.

For example, farmers may decide to grow more rice and less cassava since income levels have increased for workers, and they turn to demand more rice and less gari. Also, a family in Kumasi that used to buy small sachets of cooking oil might start buying large bottles of vegetable oil once they get better-paying jobs. In another instance, a student who used to take a trotro to campus every day might switch to using Bolt or a private car after getting a job and earning more.

Therefore, understanding income elasticity helps to explain why some products have higher demand as consumers become richer and why others decrease in demand over time.

Income Elasticity of Demand (YED)

The ratio of the percentage change in quantity demanded to the percentage change in income.

Percentage formular (YED) = [(% change in quantity demanded) / (% change in income)] Midpoint formula: YED = [(Q₂-Q₁)/((Q₁+Q₂)/2)] ÷ [(Y₂-Y₁)/((Y₁+Y₂)/2)] YED = [(Q₂-Q₁)/( (Q2+Q1)/2 [(Y₂-Y₁)/( (Y2+Y1)/2 )] or YED = [(Q₂-Q₁)/(Q₁+Q₂) [(Y₂-Y₁)/(Y₁+Y₂)] (the 2 cancels out) The coefficient of elasticity can be interpreted as Positive (YED > 0) for a Normal good. If the coefficient is Positive but Greater than 1, then the commodity is a Superior or Luxury good. Also, if the coefficient is Negative, the commodity is an Inferior good. If the coefficient is Positive but less than 1 (0 < YED < 1), the commodity is a Necessity.

Example 5

The income of a female security personnel increased from GH₵2,500 to GH₵3,000.

As a result, her monthly consumption of yoghurt increased from 25 cups to 35 cups.

Calculate the Income Elasticity of Demand (YED) using the percentage change formula.

Solution

YED %∆Q %∆P =

Step 1: Percentage change in quantity demanded 35-25 100 10 2525 X = =100 40%X

Step 2: Percentage change in income 3000-2500 100 500 25002500 X = =100 20%X YED 2.0 40% 20% = = Interpretation A YED of 2.0 indicates that yogurt is considered a Normal good. Since YED is greater than 1, demand is income elastic; an increase in income results in a proportionately larger rise in demand. Therefore it is luxury type of a normal good in this context.

Example 2

A consumer’s income rises from GH₵2000 to GH₵2,500. As a result, their monthly demand for gari increases from 11 kg to 12 kg.

Calculate the Income Elasticity of Demand (YED) using the midpoint formula.

Solution

YED =[(Q₂-Q₁)/(Q₁+Q₂) [(Y₂-Y₁)/(Y₁+Y₂)] YED = [(12-11)/(11+12) [(2500-2000)/(2000+2500)] YED , YED= = = 0.387 1 23[ ] 500 4500 ][ 0.043 0.11 ][ Interpretation A YED of 0.33 indicates that gari is a Normal good. Specifically, it is a necessity.

Since YED is less than 1, demand is income inelastic, meaning that as income rises, demand increases but by a smaller proportion.

As a student, do you agree that gari can be a necessity? Debate.

Activity 1.4 Understanding Income Changes in Ghanaian Households

This activity helps you to calculate and interpret the income elasticity of demand using real Ghanaian household scenarios to understand how spending patterns change when people’s incomes change.

Materials Needed

• Notebook or exercise book

• Pencil or pen

• Calculator (if available) Instructions

1. Work in pairs (mix genders where possible)

2. Follow each step-by-step

3. Show all your working clearly in your notebook

4. Discuss your findings with your partner Scenario: Read this scenario carefully and perform the tasks that follow.

The Asante Family’s Spending Changes

The Asante family from Kumasi experienced an income increase when Mr. Asante got promoted at his workplace. Their monthly household income increased by 40% from an initial income of GH₵2,000. As a result, their monthly consumption of chicken increased by 75% from an initial 4kg consumption.

Answer these questions

1. In your notebook, write the two YED formulas you know Percentage Formula: YED = _________________ Midpoint Formula: YED = _________________

2. Create a table like this and fill in the Asante family’s data Variable Original (Y₁, Q₁) New (Y₂, Q₂) Monthly Income (GH₵) Monthly Chicken Consumption (kg)

3. Calculate YED using the Percentage Method by completing the working

table below Calculation Steps Show your working here Answer % Change in Quantity = (Q₂-Q₁)/Q₁ × 100 % Change in Income = (Y₂-Y₁)/Y₁ × 100 YED = % Change in Qty ÷ % Change in Income Final YED Value

4. Based on your YED calculation, complete this analysis:

a. What type of good is chicken for the Asante family? Support your answer with the YED value you calculated.

b. If the Asante family’s income increases by another 20%, predict what will happen to their chicken consumption. Show your reasoning.

c. If you were a chicken seller in Kumasi, how would you use this YED information to plan your business during economic growth periods?

5. Rank them from most income-sensitive to least income-sensitive.

a. Gari (YED = -0.3)

b. Mobile phone credit (YED = 0.8)

c. Private school fees (YED = 1.5)

6. Exchange your notebook with another pair and;

a. verify their calculations

b. suggest one correction if needed Summary: YED analysis helps businesses to understand how economic growth or recession affects demand for their products, enabling better planning and market targeting strategies.

Business people in Ghana need to understand how their products relate to other products in the market. Understanding complementary goods or substitute goods helps traders to make better decisions in pricing, marketing and product improvement.

Cross Elasticity of Demand (XED) shows how the demand for one product (Good A) changes when the price of another product (Good B) changes.

Cross Elasticity of Demand (XED): The ratio of the percentage change in quantity demanded of one good to the percentage change in price of another good.

Formula:

% Change in Quantity Demanded of Good A % Change in Price of Good B XED=

Example

In Ghana, many people consider OMO washing powder and Ariel washing powder as substitutes.

The price of OMO increased from GH₵3.00 to GH₵4.00, leading to an increase in the quantity demanded of Ariel from 900 to 1300 sachets per month. Calculate the Cross Elasticity of Demand (XED) and interpret the result.

Solution

XED = (% Change in Quantity Demanded of Good A) ÷ (% Change in Price of Good B)

Step 1.

% Change in Quantity Demanded of Ariel (Good A):

1300-900 100 900 X = 44%

Step 2.

% Change in Price of OMO (Good B):

4.0-3.0 1003 X = 33.3%

Step 3.

XED = 44% 33.3% = 1.3 Interpretation XED = 1.3, which is positive and greater than 1.

This shows that Ariel and OMO are close substitutes in the Ghanaian market.

A rise in the price of OMO causes a more-than-proportional increase in demand for Ariel.

General Interpretation of Results for XED

XED Value

Relationship Between Goods

Interpretation Positive

(XED > 0) Substitute goods When the price of B increases, demand for A increases (e.g., Coke and Pepsi).

Negative (XED < 0) Complementary goods When the price of B increases, demand for A decreases (e.g., phones and phone batteries).

XED = 0 Unrelated goods A price change in Good B does not affect the demand for Good A.

Activity 1.5 XED Detective - Analysing Product Relationships in Ghanaian Markets Materials Needed

• Notebook or exercise book

• Pencil or pen

• Calculator (if available) Instructions

1. Work in pairs (mix genders where possible)

2. Follow each step-by-step

3. Show all your working clearly in your notebook

4. Discuss your findings with your partner Scenario: Read this scenario carefully and perform the tasks that follow Trotro vs. Uber Competition in Accra In Accra, when trotro fares increased from GH₵2 to GH₵3 per trip due to fuel price increases, the number of Uber rides booked daily in the same areas increased from 500 rides to 650 rides.

Answer these questions

1. In your notebook, write the two XED formulas you know Percentage Formula: XED = _________________ Midpoint Formula: XED = _________________

2. Create this table in your notebook and identify the products and data Variable Product A (Uber) Product B (Trotro) What changed? Quantity demanded Price Original value New value

3. Complete the table below by calculating XED using the Midpoint Method.

Calculation Steps Show your working here Answer Midpoint Quantity (Uber) = (Q₁ + Q₂) ÷ 2 Midpoint Price (Trotro) = (P₁ + P₂) ÷ 2 Change in Quantity = (Q₂ - Q₁) Change in Price = (P₂ - P₁) XED = (Change in Qty ÷ Midpoint Qty) ÷ (Change in Price ÷ Midpoint Price) Final XED Value

4. Based on your XED calculations, complete this analysis

a. Are Uber and trotro substitute goods or complementary goods? Explain using your XED value.

b. What does this XED value tell you about how closely these transport services compete with each other?

c. If you were managing Uber in Accra, how would you use this XED information during periods when trotro fares are likely to increase?

5. Analyse these other pairs of Ghanaian products and predict whether their XED would be positive or negative Product Pair XED Sign (+/-) Relationship Type Reasoning Gari & plantain Mobile phone & phone credit Kelewele & bofrot Car & petrol

6. Share your answers with another pair in the class.

Availability of Substitutes

If other products can be used in place of a good, then the demand is more elastic. This means that an increase in the price of one of the commodities will result in an increase in the demand for the other. Consumers can easily switch to the other.

Example: If the price of Fan Milk yoghurt becomes too high, consumers may switch to cheaper local brands like “Sobolo”. In this case, demand is elastic because substitutes are available.

Necessity vs Luxury Necessities are goods consumers cannot do without. Their demand is inelastic.

However, luxuries are goods consumers can live without; therefore, their demand is elastic.

Example: Water is a basic need for every Ghanaian household. Even if the price goes up, people will still buy it. So, water has an inelastic demand. Designer clothes, on the other hand, are luxuries. If the price increases, most people will stop buying or reduce the quantity they buy. Demand, therefore, becomes elastic.

Proportion of Income Spent on the Good

If a product takes up a large portion of a person’s income, demand for that product is usually more elastic. If it takes up only a small amount, demand is less elastic.

Example: Buying a brand-new refrigerator costs a lot of money. If the price increases, many Ghanaians will reduce their demand for it. They and look for cheaper options like second-hand or home-used fridges, making their demand elastic. A box of matches is very cheap and takes up only a small proportion of the consumer’s income. Even if the price rises, people will still buy it. Demand is for a box of matches becomes inelastic.

Time Period

In the short run, demand is often inelastic because people do not have time to adjust to changes in price. In the long run, demand becomes more elastic because people can find other alternative commodities.

Example: If electricity tariffs increase in the short run, households will continue to use electricity because they cannot immediately switch to other sources, but in the long run, they may install solar panels, making the demand for electricity elastic.

The Definition of the Market

The narrower the market (for a specific product or brand), the more elastic the demand.

The broader the market (general product type), the less elastic the demand. Example:

If the price of “Ama’s Special Kenkey” increases, people can easily switch to “Kwame’s Kenkey” next door. So, demand is elastic for a specific brand. But if the price of kenkey in general increases, consumers may still buy it because it’s part of their regular diet, especially in areas like Accra or Tema. So, demand is less elastic.

Habit of consumers When consumers develop a strong taste or likeness for a particular commodity or service, demand becomes more inelastic. However, if consumers do not like or have no strong taste for a particular commodity, the demand for that commodity becomes elastic.

Example: Some men in Ghana consume alcoholic beverages every weekend. When the price of alcoholic beverages increases, regular consumers will still buy even though it becomes expensive. Demand becomes inelastic because of the habit of the consumers.

On the other hand, demand for alcoholic beverages can become elastic when the consumers are not addicts. They can stop their patronage when prices increase.

Durability of the Commodity

When a commodity is durable, its demand tends to be more elastic because consumers can postpone its purchase when the price rises. However, if a commodity is non-durable, demand becomes inelastic since it must be purchased frequently.

Example: When the price of furniture increases, consumers can delay buying it, making demand elastic. On the other hand, goods like bread must be bought regularly, so demand becomes inelastic.

Activity 1.6 Exploring the Factors Affecting Elasticity of Demand Purpose of the Activity: This activity helps you to identify and analyse the key factors that determine elasticity by examining real business situations in a Ghanaian provision shop context.

Materials Needed

• Notebook or exercise book

• Pencil or pen Instructions

1. Work in pairs (mix genders where possible)

2. Read the scenario carefully

3. Complete the tasks in your notebook Business Scenario: Read this scenario carefully and perform the tasks that follow.

Akwasi’s Provision Shop Insights

Uncle Elikem operates a busy provision shop in Keta and has made these observations:

Bottled Water: Price increases don’t reduce sales much - customers have no alternatives nearby.

Sugar: When prices rise, customers switch to honey or buy less.

Mobile Airtime: Sales stay the same even with price increases - people need to communicate.

Luxury Biscuits: Price increases cause big drops in sales - customers see them as unnecessary.

Cooking Oil: Sales drop during lean months but stay stable during harvest season.

Bread: Initially, customers keep buying, but after months, they find cheaper alternatives.

Answer these questions

1. Complete this table by matching each product to the correct elasticity factor Elasticity Factor Product Example Why This Factor Applies Availability of Substitutes Necessity vs Luxury Proportion of Income Time for Adjustment

2. Elasticity Prediction: For each product, predict if demand is ELASTIC or INELASTIC and explain why:

a. Bottled Water: __________ because __________

b. Mobile Airtime: __________ because __________

c. Luxury Biscuits: __________ because __________

d. Sugar: __________ because __________

3. Uncle Elikem asks for your help because you are an Economist. What should he do in each of the following situations? Your answers should reflect your understanding of the elasticity of each good.

a. His cooking oil supplier wants to increase prices by 20% Your advice: ________________________________

b. A competitor opens nearby, selling cheaper sugar Your advice: ________________________________

c. He wants to increase luxury biscuit prices to earn more profit Your advice: ________________________________ Summary: Understanding elasticity factors helps business owners to predict how customers will react to price changes; hence, businesses are able to make better pricing decisions.

Elasticity of demand is not just a theory. It helps consumers, businesses and the government to make better decisions. It tells how people react when prices, income or the prices of related goods change. This helps in setting prices, creating fair taxes, planning for exports and fighting poverty. Elasticity as a concept is beneficial in the following ways.

Price Determination

Price elasticity of demand helps producers to know how to set prices for their commodities. If producers increase prices and consumers reduce their consumption or stop buying, demand is elastic for that commodity. In this case, the supplier will either reduce his prices to gain more customers or maintain the initial price to keep the customers. On the other hand, transport operators (like trotro drivers) know that increasing the fare regularly will make the passengers complain, but they cannot stop patronising their services completely. In this situation, the demand for a trotro is inelastic.

Government Revenue and Taxation Policy

The government uses the knowledge of the elasticity of demand in imposing taxes.

Goods with inelastic demand have higher taxes because consumers will continue to buy even when prices increase. Example: If the government of Ghana (Ghana Revenue Authority) imposes a tax on items like petrol, alcohol and tobacco, their price will increase in the market, but consumers will still buy them. This leads to an increase in government revenue.

Income Distribution and Social Welfare

Elasticity helps policymakers understand how price changes affect low-income households. This can guide decisions on subsidies or price controls. For example, if the price of rice or maize increases, low-income families suffer the most because they spend a lot of their income on food. Since demand for food is inelastic, the government may subsidise fertiliser or offer school feeding programs so that even low-income families can afford basic needs.

Producer Revenue and Export Planning

Producers can use the understanding of elasticity of demand to predict how price changes will affect their income, especially when selling to foreign markets. For

example, cocoa farmers in Ghana depend on world market prices. If the demand for cocoa is inelastic, a fall in price will lead to low producer revenue, even though world demand will remain the same. But if pineapples or shea butter have an elastic demand on the international market, reducing prices slightly could increase exports and revenue.

Market Structure and Competition Analysis

Cross elasticity of demand helps determine how easily consumers can substitute one good for a related good in a competitive market. For example, in Ghana’s telecom industry, people often switch between MTN and Telecel when data or call prices change. This is cross-price elasticity and shows the competitive nature of the two service providers.

Inflation Management

Goods with inelastic demand often lead to inflation because even when prices increase, consumers still buy them. Government uses this idea to guide which goods to tax, subsidise or regulate in the market. For example, when fuel prices increase in Ghana, it affects transportation and food prices. Since people cannot stop buying fuel, demand remains the same, leading to inflation. What about water and electricity consumption in Ghana? Do you see any connection? Government therefore regulates the prices of petrol, electricity, water, etc.

Agriculture and Industrial Policy Planning

Understanding the elasticity of demand helps the government decide which sectors need help and how quickly they can respond to changes in prices. For example, if tomato farmers in Ghana can grow more tomatoes when prices rise, it shows the supply is elastic. So, the government can invest in storage and roads to help it meet demand and reduce waste. However, if the supply of poultry (chicken) is inelastic and prices rise, it will take a longer time for farmers to produce more. The government may then support with subsidies to boost production over time.

Scale of Output

Elasticity of demand helps firms to determine the appropriate level of output to produce. When demand for a commodity is elastic, a fall in price leads to a large increase in quantity demanded, so firms can increase output to maximise revenue. However, when demand is inelastic, changes in price have little effect on quantity demanded, so firms may not need to expand output significantly.

Example: A firm producing soft drinks may increase its scale of output when it reduces prices because demand is elastic and sales will rise significantly. However, for essential goods like salt, demand is inelastic, so increasing output may not lead to a large increase in sales.

Wage Bargaining

Elasticity of demand for labour influences the ability of workers to negotiate for higher wages. When demand for labour is inelastic, employers are more willing to accept wage increases since employment will not fall significantly.

However, when demand for labour is elastic, wage increases may lead to a large reduction in employment, weakening workers’ bargaining power.

Example: Workers with highly specialised skills (such as doctors) have relatively inelastic demand, so they can successfully demand higher wages. However, workers in jobs with many substitutes may face elastic demand, and employers may reduce employment if wages increase.

Activity 1.7: Why Elasticity Matters

Purpose of the Activity: This activity helps you to understand how the elasticity of demand affects important economic decisions and policies in Ghana.

Materials Needed

• Notebook or exercise book

• Pencil or pen Instructions

1. Work in pairs (mix genders where possible)

2. Read each question carefully

3. Write your answers in your notebook Answer these questions.

1. Read each example carefully and complete ONLY the last column of this

table in your notebook.

Area Ghana Example Why Elasticity Matters Here

Pricing Decisions

MTN pricing data bundles & call packages Government Taxes Taxes on fuel, alcohol and tobacco Social Impact Low-income families affected by increase in food price Export Planning Ghana’s cocoa exports and world prices Market Competition MTN vs AirtelTigo - customers switch based on prices Inflation Control Rising food and fuel prices in Ghana Agricultural Policy Farmers grow more tomatoes when prices are high

2. Choose any TWO examples from the table above and explain how they affect your community or family:

Example 1: ________________ How it affects us: ________________

Example 2: ________________ How it affects us: ________________

3. Answer these questions in your notebook based on your understanding of elasticity:

a. Why should the government consider elasticity before increasing fuel taxes?

b. How does elasticity help MTN decide on data bundle prices?

c. Why do cocoa farmers need to understand price elasticity?

Summary: Elasticity of demand helps to explain how people, businesses and the government respond to price changes in areas like telecommunications, taxation, food, exports and agriculture.

Activity 1.8 Wrap up – From Demand to Elasticity Purpose: The purpose of this activity is to help you apply all demand concepts from basic definition to elasticity calculations in a real business scenario.

Duration: 45 minutes

Note: Try doing this activity on your own (individual).

Scenario: Afia’s Waakye Business

Afia runs a popular waakye stand near Kumasi Technical University. She has been observing customer behaviour and collecting data to improve her business decisions.

Market Observations

Base situation: At GH₵8 per pack, Afia sells 100 packs daily Price change: When she raised prices to GH₵10, sales dropped to 80 packs Income effect: During exam periods when students receive extra money from parents, demand increases from 100 to 120 packs (assuming 25% income increase) Substitute effect: When the nearby rice seller increased prices by 30%, Afia’s waakye sales increased to 130 packs Complementary goods: Afia noticed that when she sells more waakye, she also sells more boiled eggs and gari Answer these questions in your notebook.

1. Define demand using Afia’s business

2. Identify factors affecting the demand for her waakye

3. Explain the difference between a change in demand vs. a change in quantity demanded 4.

a. Calculate PED when the price increased from GH₵8 to GH₵10

b. Calculate YED during exam periods

c. Calculate cross-price elasticity between rice and waakye

5. Based on your calculations, advise Afia on:

a. Should she increase or decrease prices? Why?

b. How can she use elasticity knowledge to maximise revenue?

c. What pricing strategy would work for different customer groups?

6. Show your work to your friends or your teacher