ELASTICITY

ELASTICITY

▪ it is the measure of the

sensitivity or responsiveness of
quantity demanded or quantity
supplied to changes in prices
(or other factors).
DEMAND ELASTICITY

▪ indicates the extent to

which changes in price (or
other factors) cause changes
in the quantity demanded.
DEMAND ELASTICITY MAY BE
CLASSIFIED AS FOLLOWS:
▪ Price elasticity of demand.
▪ Income elasticity of
demand.
▪ Cross elasticity of demand.
Price elasticity of demand

▪ Price elasticity is used to determine the

responsiveness of demand to changes in the price
of the commodity.
▪ EP = percentage change in quantity demanded/
percentage change in price
▪ = QD2-QD1/QD1 P2-P1/P1
▪ where Ep = price elasticity of demand
▪ QD2 = new quantity demanded
▪ QD1 = original quantity demanded
▪ P2 = the new price
▪ P1 = the original price.
Ep= QD2-QD1/QD1 / P2-P1/P1

▪ Sample problem: What is the demand elasticity given

the following:
▪ 1. Original quantity demanded = 10,000 kg
▪ 2. Original price = P5.00 per kilo
▪ 3. New Quantity demanded = 16,000 kg
▪ 4. New price = P4.00 per kilo
▪ Answer : 16,000-10,000 = 6,000 = 0.6
10,000 10,000
4.00-5.00 = - 1 =
5.00 = 5
= 0.6
-.02 = - 3 (Absolute value)
PRICE ELASTICITY
OF DEMAND
CLASSIFIED:
1. ELASTIC DEMAND

▪ is that type of demand where the

quantity that will be bought is
affected greatly by changes in the
price. - the change must be
greater than elasticity coefficient
of 1.
2. INELASTIC DEMAND

▪ this refers to the demand where a percentage

change in price creates a lesser change in
quantity demanded.
▪ the elasticity coefficient in this type is less
than 1.
▪ the demand for necessities like food,
clothing, & shelter is inelastic. Consumers will
continue to buy necessities in quantities
previously purchased regardless of changes in
prices of such goods.
3. UNITARY DEMAND

▪ in this type of demand, a change in

price creates an equal change in
quantity demanded.
▪ elasticity under the unitary demand is
equal to the coefficient of 1.
▪ ex. when a 20% price reduction
resulted to a 20% increase in demand.
INCOME ELASTICITY OF DEMAND

▪ refers to the determination of the

responsiveness of demand to a change in
consumer income.
▪ Ey = percentage change in quantity
demanded/percentage change in income
▪ = QD2-QD1/QD1 Y2-Y1/Y1
▪ where Ey = income elasticity of demand
▪ Y2 = the new income
▪ Y1 = the original income
▪ When elasticity is greater than 1,
demand is said to be income elastic
▪ when less than 1, it is income inelastic
and
▪ when equal to 1, it is unitary elastic.
CROSS ELASTICITY OF DEMAND

▪ refers to the responsiveness of the quantity

demanded of a particular good to changes in
the price of another good.
▪ Ec = QA2-QA1/QA1 PB2-PB1/PB1
▪ where Ec = cross elasticity of demand
▪ QA2 = new demand for product A
▪ QA1 = original demand for product A
▪ PB2 = new price of product B
▪ PB1 = original price of product B
DETERMINANTS OF DEMAND
ELASTICITY
▪ 1. The price of the good in relation to the
consumer's budget - consumers are more
sensitive to price changes of goods that take
a big amount of their budget.
▪ 2. The availability of substitutes - the more
and the closer substitutes are, the more
people will switch to substitutes, when the
price of the good rises.
CROSS ELASTICITY OF DEMAND

▪ 3. The type of good - the demand elasticity of

a good is affected by its type, like whether it
is a luxury or a necessity.
▪ 4. The time under consideration - the
demand for a good becomes more elastic
over a longer period of time. Ex. if the price of
rice rises, people may consider switching to
bread, corn, or other cereals. Switching will
be slow, however, but much can be achieved
when a longer period is considered.
ELASTICITY OF SUPPLY

▪ refers to the responsiveness of the sellers to a

change in price.
▪ Es = percentage change in quantity
supplied/Percentage rise in price
▪ Where Es = price elasticity of supply
▪ QS2-QS1/QS1 P2-P1/P1
▪ QS2 = new quantity supplied
▪ QS1 = original quantity supplied
▪ P2 = new price
▪ P1 = original price
CLASSIFICATIONS OF SUPPLY
ELASTICITY
▪ 1. Elastic supply - when the quantity supplied is
affected greatly by changes in the price. The
change is greater than the elasticity coefficient of
1.
▪ 2. Inelastic supply - when the quantity supplied is
not affected greatly by changes in the price. The
elasticity is less than 1.
▪ 3. Unitary elastic supply - when the percentage
change in the quantity supplied is equal to the
percentage change in price. The elasticity
coefficient is equal to 1.
DETERMINANTS OF SUPPLY
ELASTICIY
▪ 1. The feasibility and cost of storage -
regardless of price, perishable goods
like vegetables must be brought to
the market. If storage cost is high,
even if it is available, the sellers have
no choice but to sell at prevailing
prices. Supply is inelastic in this case.
DETERMINANTS OF SUPPLY
ELASTICIY
▪ 2. The ability of producers to respond to price
changes - if the producers can easily increase
or decrease output when prices rise or fall,
supply is elastic.
▪ 3. Time - with the passage of time, especially
for long periods, supply tends to be elatic. If
there is a rise in prices, the producers may not
be able to make adjustments quickly, but
given sufficient time, they may be able to
produce more.