Elasticity

Habari Mwanafunzi! Welcome to the World of Elasticity!

Ever wondered why when the price of matatu fare goes up by 10 shillings, we all complain but still board the matatu, yet if the price of a movie ticket goes up by the same 10 shillings, we might just decide to stay home and watch something on our phones? Why are we so "stubborn" with some products and so "flexible" with others?

That, my friend, is the magic of Elasticity! It’s not about a rubber band, but it's about how much we stretch or change our buying habits when things like price or our income change. It’s one of the most powerful concepts in microeconomics, helping us understand the Kenyan market, from the price of unga at the supermarket to the cost of your Safaricom data bundles.

Let's dive in and unravel this concept together. You've got this!

The Big Boss: Price Elasticity of Demand (PED)

This is the most common type of elasticity. It measures how much the quantity of a product that people want to buy (quantity demanded) changes when its price changes.

Think of it as a "responsiveness score."

• A high score means consumers are very responsive (sensitive) to price changes. This is called Elastic Demand.
• A low score means consumers are not very responsive. This is called Inelastic Demand.

Image Suggestion:

A vibrant, split-panel digital illustration of a Kenyan market scene.
Left Panel: Titled 'INELASTIC'. A customer is at a kiosk buying a small packet of salt. The price tag has been changed from KSh 15 to KSh 20. The customer looks slightly annoyed but is still handing over the money. The slogan is "You still need it!"
Right Panel: Titled 'ELASTIC'. The same customer is at a soda vendor's stand. The price for a specific brand of soda (e.g., "Kula Fizz") has gone up from KSh 80 to KSh 120. The customer is shaking their head and pointing to a cheaper, alternative brand right next to it. The slogan is "I'll just get something else!"

Calculating PED

The formula looks a bit scary, but don't worry, it's quite simple once you break it down.

PED = (% Change in Quantity Demanded) / (% Change in Price)

Let's do an example. Imagine your local mama mboga sells avocados.

Scenario: The Avocado Price Hike

Mama Njoroge usually sells her avocados for KSh 20 each, and at this price, she sells about 100 avocados a day. One week, due to a shortage, she increases the price to KSh 25. She notices that she now only sells 60 avocados a day. Is the demand for her avocados elastic or inelastic?

Step 1: Calculate the Percentage Change in Quantity Demanded.

Formula: [(New Quantity - Old Quantity) / Old Quantity] * 100

Calculation: [(60 - 100) / 100] * 100
           = [-40 / 100] * 100
           = -0.4 * 100
           = -40%

Step 2: Calculate the Percentage Change in Price.

Formula: [(New Price - Old Price) / Old Price] * 100

Calculation: [(25 - 20) / 20] * 100
           = [5 / 20] * 100
           = 0.25 * 100
           = 25%

Step 3: Calculate the PED.

PED = (% Change in Quantity) / (% Change in Price)

Calculation: (-40%) / (25%)
           = -1.6

The Result: We ignore the negative sign (it's always negative for demand) and look at the number: 1.6. Since 1.6 is greater than 1, the demand for Mama Njoroge's avocados is ELASTIC. This means her customers are very sensitive to the price change!

Understanding the PED Value

• If |PED| > 1: Demand is Elastic (Like the avocados. A small price change caused a big drop in sales).
• If |PED| < 1: Demand is Inelastic (Think of KPLC tokens. If the price goes up a bit, you still buy them because you need electricity).
• If |PED| = 1: Demand is Unit Elastic (The percentage change in quantity is exactly the same as the percentage change in price).

Visualizing Elasticity

A simple way to remember this is by the steepness of the demand curve.

   Price |              Price |
         | D\                 |
         |   \                |
         |    \               |    D
         |     \              |__________
         +-------- Quan.      +---------- Quan.
        
     INELASTIC DEMAND          ELASTIC DEMAND
     (Steep like a cliff)      (Flat like the savannah)

The Nosy Neighbours: Other Types of Elasticity

Price isn't the only thing that affects our buying habits. Our income and the prices of other goods also play a big role!

1. Income Elasticity of Demand (YED)

This measures how our demand for a good changes when our income changes. Are you going to buy more nyama choma now that you've gotten a better job?

YED = (% Change in Quantity Demanded) / (% Change in Your Income)

• Normal Goods (YED > 0): As your income increases, you buy more of these. E.g., better clothes, more data bundles, eating out at Java House.
• Inferior Goods (YED < 0): As your income increases, you buy less of these. E.g., you might stop buying second-hand clothes (mitumba) and go to a retail store instead. You might use matatus less and start using Uber or Bolt more often.

2. Cross-Price Elasticity of Demand (XED)

This one is about teamwork or rivalry! It measures how the demand for one product (Product A) changes when the price of another product (Product B) changes.

XED = (% Change in Quantity Demanded of Product A) / (% Change in Price of Product B)

• Substitutes (XED > 0, a positive number): These are rival products. If the price of cooking with charcoal goes up, the demand for gas (LPG) might increase. If the price of a Telkom data bundle goes up, the demand for Safaricom bundles might increase.
• Complements (XED < 0, a negative number): These products work together. If the price of smartphones goes down, the demand for phone cases and screen protectors will likely go up. If the price of petrol goes up, the demand for large, fuel-guzzling cars might go down.

Scenario: The Chapati vs. Rice Dilemma

You run a small hotel (kibanda) on campus. You notice that when the price of wheat flour (for chapati) goes up, more students start ordering rice with their stew. In this case, chapati and rice are substitutes. The XED would be a positive number because the price increase of one led to a demand increase for the other.

So, Why Does This Matter?

Understanding elasticity is crucial for everyone!

• For Businesses: A company like East African Breweries Limited (EABL) needs to know if increasing the price of Tusker will cause a huge drop in sales (elastic demand) or just a small one (inelastic demand).
• For the Government: When the government wants to raise revenue, they put taxes on goods with inelastic demand, like fuel and cigarettes. Why? Because they know that even if the price goes up, people will still buy them, guaranteeing tax revenue. This is why we complain about fuel prices, but we still have to buy it!
• For You: It helps you understand your own behaviour as a consumer and make smarter decisions.

Brilliant work getting through this! Elasticity is a fundamental building block of economics. Keep practicing with different examples from your daily life, and soon you'll be seeing it everywhere you look. Keep up the great spirit!