Lecture 3

Elasticity
PRICE, INCOME, AND CROSS-PRICE ELASTICITY OF
DEMAND, AND PRICE ELASTICITY OF SUPPLY

Elasticity
u

Not only are we concerned with what direction

price and quantity will move when the market
changes, but we are concerned about how
much they change.

Elasticity gives a way to measure by how much

a variable will change with the change in
another variable.

Elasticity
u

It measures the responsiveness or the sensitivity

of a dependent variable (Y) to changes in an
independent variable (X).

%
=
%
u

It gives the percentage change in the

dependent variable that results from a one
percentage change in an independent
variable.

Elasticity
u

It measures the responsiveness or the sensitivity

of a dependent variable (Y) to changes in an
independent variable (X).

%
=
%
u

It gives the percentage change in the

dependent variable that results from a one
percentage change in an independent
variable.

Price Elasticity of Demand

u

It measures the responsiveness or the sensitivity

of quantity demanded to changes in Price.

Price Elasticity of Demand:

Degrees
Elastic

Inelastic

Unitary Elastic

Demand is elastic if a
specific percentage
change in price
produces a larger
percentage change
in quantity
demanded.

Demand is inelastic if
a specific
percentage change
in price produces a
smaller percentage
change in quantity
demanded.

Demand is unitary
elastic if a specific
percentage change
in price produces the
same percentage
change in quantity
demanded.

% > % - > 1

% < % - < 1

% = % - = 1

Price Elasticity of Demand:

Extreme Cases
Perfectly Elastic
Demand is perfectly elastic if
quantity demanded is
extremely responsive to even
very small changes in price.
Price

P*

Perfectly Inelastic
Demand is perfectly inelastic if
quantity demanded is totally
unresponsive to any changes
in price.
Price

= 0

Quantity

Quantity

Price Elasticity of Demand:

Determinants
u

Availability of substitutes

with many substitutes demand is elastic

with less substitutes demand is inelastic

Type of product

luxury demand is elastic

necessity demand is inelastic

Price Elasticity of Demand:

Determinants
u

Proportion of expenditure to income

larger proportion demand is elastic

Smaller proportion demand is inelastic

Time horizon

long-run demand is elastic

short-run demand is inelastic

Price Elasticity of Demand:

Philippines
Source: Estimating Price
and Income Elasticities of
Demand of Selected Food
Commodities in the
Philippines (2011), Bureau
of Agricultural Statistics

Income Elasticity of Demand

u

It measures the responsiveness or the sensitivity

of quantity demanded to changes in income.
Point Formula

=

Midpoint/Arc Formula

( + )
=

( + )

Income Elasticity of Demand:

Classification of Products

Normal

Inferior
-2

-1

Necessity

Neutral

Superior/Luxury

Cross-Price Elasticity of Demand

u

It measures the responsiveness or the sensitivity

of quantity demanded of product X to changes
in the price of product Y.
Point Formula

Midpoint/Arc Formula

( + )
=

( + )

Cross-Price Elasticity of Demand:

Type of Products

Substitutes

Complements
-2

-1

Unrelated

Price Elasticity of Supply

u

It measures the responsiveness or the sensitivity

of quantity supplied of product X to changes in
the price.
Point Formula

=

Midpoint/Arc Formula

( + )
=

( + )

Price Elasticity of Supply:

Degrees
Elastic

Inelastic

Unitary Elastic

Supply is elastic if a
specific percentage
change in price
produces a larger
percentage change
in quantity supplied.

Supply is inelastic if a
specific percentage
change in price
produces a smaller
percentage change
in quantity supplied.

Supply is unitary
elastic if a specific
percentage change
in price produces the
same percentage
change in quantity
supplied.

% > % @ > 1

% < % @ < 1

% = % @ = 1

Price Elasticity of Supply:

Extreme Cases
Perfectly Elastic
Supply is perfectly elastic if
quantity supplied is very
responsive to even very small
changes in price.
Price

P*

Perfectly Inelastic
Supply is perfectly inelastic if
quantity supplied is totally
unresponsive to any changes
in price.
Price

@ = 0

@ =

Quantity

Quantity

Price Elasticity of Supply:

Summary of Degrees

Inelastic

Perfectly Inelastic

Unitary Elastic

Elastic
Perfectly Elastic