CONCEPT OF ELASTICITY

ELASTICITY
It measures the responsiveness on one variable to a certain change
of another variable.
Types of Elasticity
a. PRICE ELASTICITY
A measure used in determining the percentage change in quantity
against the percentage change in price.
b. INCOME ELASTICITY
The percentage change in quantity compared to the percentage
change in income.
c. CROSS ELASTICITY
The percentage change in quantity of one good compared to the
percentage change in price of related goods.

Price Elasticity of Demand

 Degree of responsiveness of consumers with which quantity
demanded for every change in price.
%ΔQ ED= Q2-Q1
PED=
%ΔP (Q1+Q2)/2
P2-P1
(P1+P2)/2
Price Elasticity of Supply
 Measures the degree of responsiveness of suppliers with which
quantity for every change in price.
%ΔQ ED= Q2-Q1
PES=
%ΔP (Q1+Q2)/2
P2-P1
(P1+P2)/2
Classification of Price Elasticity Demand and Supply

Elasticity Elasticity Concept

Coefficient
Elastic >1 If price changes, it yields to a very
considerate change in quantity
Inelastic <1 If price changes, it will result to a modest
change in quantity
Unitary =1 A change in price of the commodity will result
to the same magnitude of change in quantity
Perfectly ∞ There is a very little change in price but there
Elastic is a big change in quantity
Perfectly 0 No change in quantity but there’s a change
Inelastic in price

Cross Elasticity of Demand

Measures the responsiveness of consumers with which quantity

demanded for good A changes for every given change in the price for
good B.

CED= % change Of QD of one good  Substitute good

% change of P of the other good Elasticity coefficient > 0

CED= Q2a-Q1a  Complementary Good

Q1a Elasticity coefficient < 0
Y2b-Y1b
Y1b
Income Elasticity of Demand
Measures the responsiveness of the consumers to the change on
Income

Ei= change in Qd  Normal Good

QD Ave Elasticity Coefficient >0
Change in income  Inferior Good
Income Ave Elasticity Coefficient <0
 Income elastic >1
 Income inelastic <1
 Income unitary =1
Ei= Q2-Q1
Q1
Y2-Y1
Y1
Importance of Total Revenue in pricing decisions
Total Revenue (Profit)
 The total sale of products by the producer or seller.
 Inelastic
TR old= (P old) (Qd old) If the price increases the total revenue increases.
TR new= (P new) (P new)  Elastic
If the price increases the total revenue decreases.
 Unitary
If the price increases the total revenue is
constant.

Note: In comparing two total revenues, whichever yields a higher TR

holding other things constant, the price charged is the best price of the
good, whether it is the old price or the new price.