11/6/21, 11:22 AM Lesson 1: Introduction to Elasticity: Managerial Economics

Lesson 1: Introduction to Elasticity

Course Code:      Econ 1 (Managerial Economics)

Module Code:     5.0 (Elasticity of Demand and Supply)

Lesson Code:      5.1 (Introduction to Elasticity)

I. LESSON OBJECTIVES:
At the end of this lesson, the student should be able to:

1. understand the concept of elasticity;

2. explain the significance of elasticity concept; and
3. exemplify the importance and application of elasticity in individual and business decision making.

II. DISCUSSION PROPER:

The discussion about the law of supply and demand tells us what will happen to quantity supplied
and quantity demanded when there are price changes. It also tells us what factors can make the
entire supply and demand curve shift at a given price. However, these concepts do not capture
the behavior on how much more or how much less the consumers and producers will buy or sell.

This module introduces the concept of elasticity which addresses the abovementioned limitation of
supply and demand. Elasticity captures the sensitivity or responsiveness of consumers
and producers to price and income changes (Bello et al., 2009).

Let us recall first the law of demand and law of supply. The law of demand tells us that consumers
buy more if the price of a good decreases and buy less if price increases. On the other hand, the law
of supply states that producers supply more if the price of a good increases and supply less if price
decreases. For us to further understand the behavior of consumers and producers when there
are price or income changes, the concept of elasticity will be introduced in this module.

As defined by Bautista et al., (2013), “The concept of elasticity gives the exact measurement of the
responsiveness of quantity demanded and supplied to changes in variables.” Given this, what do you
think is the importance of the notion of elasticity to the consumers, producers, and the government?
For the side of the consumers, the elasticity of demand tells how sensitive or responsive they are
to price and income changes. Take this scenario, as an example. Say there is a price increase on
vehicles, elasticity of demand can explain how responsive the consumers are and how much change
in quantity demanded of vehicles will there be. This can also help the automobile firm in identifying
the effects of price increase on vehicles to their sales and profit. In the same manner, the elasticity
of supply tells how sensitive or responsive the producers are to changes in price. Say the price of

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11/6/21, 11:22 AM Lesson 1: Introduction to Elasticity: Managerial Economics

vehicles increases or decreases, elasticity of supply can capture how much change in quantity
supplied of vehicles will there be. Government officials are also concerned with the result of raising
tax or prices of goods and services. By how much will the quantity demanded or supplied change if
there is an excise tax or price increase on vehicles? By how much will the quantity demanded or
supplied change when they impose a higher sin tax on cigarettes and alcoholic beverages? The
concept of elasticity can give an outright answer to these questions (Bautista et al., 2013).

In general, the demand or supply is said to be elastic when the percentage change in price resulted
to a larger percentage change in quantity demanded or supplied. This means that consumers or
producers are responsive to price or income changes. On the other hand, the demand or supply is
said to be inelastic when the percentage change in price resulted to a smaller percentage change
in quantity demanded or supplied. This means that consumers or producers are not that responsive
to price and income changes. Lastly, the demand or supply is said to be unit elastic when the
percentage change in price resulted to an equal percentage change in quantity demanded or
supplied.

Additionally, there are extreme cases of elasticity. The first one is perfectly elastic demand or supply
which means that a small change in price might cause the consumers or producers to be
highly responsive and change the quantity demanded or supplied sharply or worst case, they might
leave the market. The second one is perfectly inelastic demand or supply. This means that
consumers and producers are not responsive at all to any price changes. The general formula in
computing the elasticity is:

Table 1 also shows the elasticity value and their corresponding description.

Lastly, elasticity can be subdivided into four types: own price elasticity of demand, cross-price
elasticity of demand, income elasticity of demand, and price elasticity of supply. In
depth discussion of these types will be presented in the next lessons.

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11/6/21, 11:22 AM Lesson 1: Introduction to Elasticity: Managerial Economics

III. EVALUATION:
NONE

IV. REFERENCES
Bautista et al., (2013). Economics and society. Quezon City, Philippines: Ateneo de Manila University
Press.

Bello, A., Bello, R., Camacho, J., Catelo, M., Cuevas, A. & Rodriguez, U. (2009).
Economics. Quezon City, Philippines: C&E Publishing, Inc

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