Responsiveness of change in quantity demand to a change in income is explained as income elasticity of demand.

• Relationship between income and demand varies
• Responsiveness of change in quantity demand to a change in income can be
  calculated using the following formula

Yed =  Percentage in quantity demad of good /Percentage change in income

Yed =  { (ΔQd/ΔY) X (Y/Q) }

 

 

Goods can be classified according to income elasticity of demand.

• Normal goods Luxury goods
• Essential goods
• Inferior goods
• Income elasticity of demand is positive in normal goods, and less than one.
• Income elasticity of demand more than one is luxury goods.
• If income elasticity of demand is less than one, these goods are said to be essential
  goods.
• Demand for essential goods, sometimes does not change / remain constant ; if
  income is changed.
• When income increases , demand for inferior goods decreases and income elasticity
  is negative.
• This relationship can be illustrated with the following graph
• Determinants of income elasticity of demand can be explained as
• Nature of goods, income group of consumer and etc.

Practical importance of income elasticity of demand can be explained as, follows

• Goods can be classifies with income elasticity of demand.
• Income gap of people can be identified.

Responsiveness of a change in quantity demand of other good to a change in price of the good concerned is explained as cross elasticity of demand.
Cross elasticity of demand can be computed as follows

• Cross elasticity of demand = Percentage change in quantity demand of good X /                                                                                                   Percentage change in price of good Y

                                                                      (Exy = ΔQDX% / ΔPY% )

• When cross price elasticity is calculated , the answer is explained as coefficient of cross price elasticity of demand.

Goods can be classified according to the coefficient of cross price elasticity of demand as

• Substitutes
• Complementary goods
• If there is a positive slope of the demand curve which is drawn with substitute goods
• If there is a negative relation ship between the price of one good to the quantity of other good, then the goods are said to be complements.
• There is a negative slope of the demand curve which is drawn with complementary goods.
• If the cross elasticity of demand is zero that means there is no relationship between the two goods.( Unrelated goods)
• Cross elasticity of demand can be used practically as follows,
• To realize interrelationship between two goods.
• To recognize the quantity of production function to compiling economic policies.

Elasticity is responsiveness of change in dependent variable relative to independent variable

• Price elasticity of demand is the responsiveness to change in quantity demanded
  relative to change in price

Price elasticity can be calculated as follows

Price elasticity  = Precentage change in quantity demand / Precentage change in price (ΔQD% /ΔP%)

• Elasticity can be calculated under point elasticity formula and arc elasticity formula
• Point elasticity formula estimates the elasticity of given point considering small change in price and quantity
• In point elasticity formula, percentage change of price and quantity are calculated relative to initial price and quantity
• Even though the slope is constant, quantity and price change from point to point. Elasticity of a linear demand curve that slopes from left to right changes from point to point. Elasticity varies from zero to infinity

Following are three specific situations that have a constant elasticity coefficients throughout the demand curve,

• Perfect elastic demand
• Perfect inelastic demand
• Unitary elastic demand
• Arc elasticity formula can be used to calculate the elasticity of a range
• Arc elasticity formula considers a big change in price and quantity
• In point elasticity formula, percentage change of price and quantity are calculated relative to mean or average value previously and now.

Types of elasticity which derived according to the elasticity formula can be shown below

• Zero(0)- Perfect inelastic
• Less than one(<1)-inelastic
• Equal to one (1)-unitary
• More than one(>1)-elastic
• Infinity perfect elastic
• There is a relationship between price elasticity and consumer outlay/ producer revenue
• Since demand function contains the inverse of the slope, elasticity also can be calculated through it.

The consumer outlay can be calculated through multiplying the quantity demanded by the price.

• The producer revenue can be calculated through multiplying the quantity sold by the price.
• Due to quantity sold being equal to the quantity purchased, production revenue is equal to consumer outlay.

When the price is changed, the consumer outlay is changed according to the type of price elasticity.

• There is a positive relationship between change in price of a inelastic good and
  change in consumer outlay
• When the price increases, the consumer outlay increases.
• When the price decreases, the consumer outlay decreases.
• If the demand of a commodity is unitary, the consumer outlay could not be changed
  when the price of the commodity is changed.
• It would be an inverse relationship between the change in price of a good and
  change in consumer outlay , if the demand for a commodity is elastic.
• When the price increases the consumer outlay decreases.
• When price decreases the consumer outlay is increases.
• Various reasons affect to determine price elasticity of demand.

The reasons that affect change of price elasticity of demand is defined as determinants of price elasticity and these are mentioned below.

• Availability of substitutes for a good
• Income which is spent on the good
• Definition of the good
• Benefits of the good
• Luxuries and Necessities
• Time period needed to adjust the price changes.

• The contemporary social, political, economic and cultural changes takes place domestically and globally affects a country’s economy.
• These contemporary economic events are mainly categorized as domestic and global.

 Global contemporary Economic events 

• Global contemporary economic events affect Sri Lankan economy in favourable and unfavouarable way and it can be explained with an example below:
  • Increase in prices of crude oil in foreign market affected Sri Lankan economy in an unfavourable way by increasing prices here.

Domestic contemporary Economic events 

• Domestic contemporary economic events affect Sri Lankan economy in favourable and unfavouarable way and it can be explained with an example below:
  • Tsunami disaster affected development of Sri Lankan economy in an unfavourable way by destroying of infrastructure, industries, human lives and property in coastal areas.

• Total resource in Sri Lanka comprises with stock of the country is constituted by Gross Domestic Product and with imports of goods and services.
• After independence, the total resources of Sri Lanka have changed during different t time following the changes in Gross Domestic Product and import structure.
• Economic policies and new strategies were used to increase the Gross Domestic Product and then to increase the total amount of resources.
• Sri Lanka’s total resource utilization comprises consumption, investment and exports of goods and services.
• Sri Lanka’s national savings constitute domestic and foreign savings.
• Where domestic savings constitute public and private savings.
• Foreign savings constitute net foreign factor income and net foreign private transfers.
• To improve a country’s national savings the net foreign private transfers should improve.
• Improving domestic savings and foreign savings leads to increase investments which contributes greatly to economic growth.

Most important periods related to economic growth  After independence 

• The period of 1948 to 1977
• The period after 1977

• Relative to other sectors, service sector contribution towards economic development process shows a progress.
• Service sector contribution which remained at 34% in1950 has grown up to 46% in 1977 and further grown up to 50% during 1991-2000 decade and recorded a value of 57.7% in2009.
• Service sector is expanding further within economy.

Importance of expanding the Services sector

• When a country is moving towards a fast economic growth the elasticity of demand for services will takes a value of greater than one which would leads to services sector progress.
• Service sector expansion is important for a small country like Sri Lanka, as the natural resources required for services remain at a very low level comparing to other sectors.
• As a result of protecting natural capital includes in the concept of sustainable development the expansion of services sector takes place within globalization process which will leads to achieve high benefits.
• Services sector records a high productivity relative to agricultural and industrial sectors.
• It is important in generating income sources for increasing population.
• As the most efficient sector, the contribution of services sector is important to generate assets on agricultural and industrial sector.
• Services sector helps in expanding choices of public by coordinating the fields of production, distribution and consumption.

• Industrial sector contribution is 30% in gross terms.
• Industrial sector is categorized into four sub sectors:
  • Mining and quarrying
  • Manufacturing
  • Electricity, Gas and water
  • Constructions
• More than 50% of industrial sector in Sri Lanka includes production industries. By following international standardization of production industries the industries which are in head can be list out in this way:
  • Textiles, garments and leather products
  • Food and drinks production
  • Plastic, chemicals, crude oil and rubber products
  • Non metallic and processed metal products
• Within overall performance in industrial sector during different time periods different
  industrial policies were used and are used to develop industrial sector:
  • Encourage import substitution industries
  • Export oriented industries
  • Improve small and medium scale industries

Steps taken by government towards Industrial sector development

• Broaden the ways of entering into global market
• Provide public financial assistance to the private sector for the usage of advanced technology
• Establish local industrialization programmes which evolved from private and public sector goal orientation

Objectives of 2006-2016 ten year Industrial development plan in Sri Lanka 

• Establish competitive firms to achieve a higher productivity in Sri Lanka
• Establish local industries based on new findings at national level
• Promote micro industries started at very small scale
• Development of infrastructure by government to improve competitiveness among firms
• Based on territory promote industrial clusters and industrial exports
• Within foreign policy promote direct investments with cooperating among all countries

• Before 1977 agricultural sector was dominated in Sri Lanka.
• Half of the national production was supported by agriculture.
• Before 1977 within state dominated economic policy more were engaged in paddy farming and rural sector food crops farming.
• Domestic agricultural sector contribution towards Gross Domestic Product declined gradually.
• Today large contribution of agricultural sector is consists with other crops including vegetables and fruits.
• Second and third place are owned by paddy and plantation crops in order.

Problems relating to Domestic agriculture

• Importing of agricultural crops create problems in domestic agriculture
• Increase in prices of agricultural inputs
• Problems like weak water management and lack of high quality seeds
• Insect problems
• Demarcation of lands and problems in tenant cultivation
• Problems with marketing
• Damages to pre and post harvest
• Using of more lands for plantation crops

 Policy strategies taken in recent to improve Domestic agricultural sector 

• Act to improve skills used in agriculture
• Empower private entrepreneurs
• Improve food processing technology
• Improve cultivation of fruits and flowers
• Improve domestic milk production
• Spread the knowledge of information technology relating to agriculture at rural level
• Protecting of resources

 Steps taken recently to improve Plantation sector 

• Making of a national plan for the development of plantation sector.
• Establish an active fund for the development of plantation crops of tea, rubber and coconut
• Providing of fertilizer subsidy

 Agro based Industries 

• Coconut related industries
  • Coconut oil production
  • Copra production
  • Coir related products
• Milk related industries
  • Yogurt production
  • Ice cream production
  • Curd production
• Rubber related industries
  • Tire production
  • Metres production
  • Sheet rubber production

At a certain time, when other factors affected the demand remains constant, that is, quantity demanded decrease when price is increased, and quantity demande  increased when price decreased.
• Due to this inverse (negative) relationship between the price of the good and the
quantity demanded, the point moves along the demand curve.
• When moving upwards along the curve, the demand is contracted and when moving
downwards along the curve, the demand is expanded.
• When the price of the good remains constant, the demand curve is shifted right or
left due to other factors: price of related goods, taste of the consumer and future
price expectations.
• These are known as the decrease in the demand and increase in the demand.
• The change in quantity demanded and the change in demand are two concepts which
are different from each other.

Analyze the inverse relationship between price and quantity demanded when other factors remain constant at a certain time.

Analyze the law of demand in the following ways.

• Demand schedule
• Demand curve
• Demand equation

 

• When other factors remain constant and at a certain period of time the table which show the quantities demanded at various price is called demand schedule., the list of number are called demand schedule
• At a certain time when other factors remain constant, the curve which combined all the points of quantities demanded at various prices of the considering good is the demand curve.
• When other factors remain constant, the equation which explains the inverse relationship between the price of considered goods and the quantity demanded is the demand equation.
• When other factors remain constant, the demand curve has a negative slope due to the inverse relationship between price of the good and quantity demanded.

 

The three determinants of the inverse relationship between the price of the good and quantity demanded, are

• Income effect
• Substitution effect
• The change in real income of individuals as the change in the price of goods at a
  certain time, when other factors remain constant is known as income effect.

The substitution effect could be explained as below.

• Assume that the other factors except price of the good remain constant
  (including the price of substitution goods)
• In this type of situation, the quantity demanded of that good would be increased or decreased on the change of comparative price that resulted from increase or decrease of the price of the considered good.
• This is the substitution effect. (Explain with an example).
• As the marginal utility decreases when consumption increases, the consumers are
  willing to consume more goods only if they are charged less. Therefore the demand
  increases when the price decreases.

Contradictions of the law of demand.

• Giffen goods
• Prestigious consumption
• Goods which represent the quality by price.