The Concept of Elasticity

There are several factors affecting the consumers in deciding how many of a commodity will be bought.
Any change (increase or decrease ) in these factors will result to a reaction on the part of the consumer.
An increase in the price (while the other factors are held constant) will lead to a decrease in the quantity
to be purchased. An increase in the income of the consumer (while the factors are held constant) will
mean more quantity to be demanded for normal commodity. The degree of the consumer’s
responsiveness or reaction to changes in the factors affecting demand is known as the demand elasticity.

A. Price Demand Elasticity. It measures the consumer’s responsiveness or reaction to changes to

the price of the product. It is obtained by getting the quotient of the percentage change in
quantity demanded in response to a given percentage change in the price.

Pde = percentage change in quantity demanded = % ΔQx

Percentage change in the price of the commodity % ΔPx

Q2 – Q1
Q1
= ________
P2 – P1
P1

Comparison of slope and elasticity

Slope = ΔQ Price Elasticity = % Qx

ΔP % Px

Example: Let P1 = 2 Q1 = 10
P2 = 3 Q2 = 4

Slope = 4 - 10 = -6 = -6
3- 2 1

Price = 4 - 10
Elasticity 10 -0.6
-------------- = -------- = -1.2
3 - 2 0.5
2
Values and Types of Elasticity
/E/ = 1 Unitary Elastic, that is when % ΔQ = % ΔP
/E/ > 1 Elastic, that is when % ΔQ > % ΔP
/E/ < 1 Inelastic, that is when % ΔQ < % ΔP
/E/ = 0 Perfectly Inelastic

B. Income Elasticity. It measures the consumer’s responsiveness or reaction to changes in his

income. It is obtained by getting the quotient of the percentage change in the quantity demanded
in response to a given percentage change in the income.

Ie = percentage change in quantity demanded = % ΔQx

Percentage change in income % ΔIx

Q2 – Q1
Q1
= ________
I2 – I1
I1

Example: Let I1 = 1000 Q1 = 20

I2 = 2000 Q2 = 50

Income 50 - 20 30
Elasticity 20 20 1.5
= -------------------- ------------ = -------- = 1.5
2000 -1000 1000 1
1000 1000

* Interpretation of the income elasticity = 1.5

This means that for every one percent increase in the Income of the consumer, the
quantity demanded will be increase by 1.5 percent. Also, the result indicates that the
consumer is highly responsive (elastic) to changes in income.

More so, the positive sign of the income elasticity signifies that the commodity
being purchased is a normal (superior)good. This tells that the consumption of the
commodity increases as income increases. When the sign of the income elasticity is
negative, it indicates an inferior commodity.
C. Cross Price Elasticity. It measures the consumer’s responsiveness or reaction to changes in the
price of related commodities. It is obtained by getting the quotient of the percentage change in
the quantity demanded in response to a given percentage change in the price of elated
commodities.

CPe = percentage change in quantity demanded for product (X) = % ΔQx

Percentage change in the price or related commodities(Py) % ΔPx

Q2 – Q1
Q1
= ________
Pye – Py1
Py1

Example: Let Py1 = 300 Q1 = 10

Py2 = 200 Q2 = 50

50 - 10 40
10 10 4
CPe = -------------------- ------------ = -------- = -12
200 -300 -100 -0.33
300 300
* Interpretation of the cross price elasticity = -12

This means that for every one percent increase in the price of related commodity,
the quantity demanded will decrease by 12 percent. Also, the result indicates that the
consumer is highly responsive (elastic) to changes in the price of related commodity.

More so, the negative sign of the cross elasticity signifies that the commodities
being compared are complementary. If the sig is positive, then the commodities
compared are substitutes.