AB 301

ELASTICITY

Cross-Price Elasticity of Demand

 Cross-Price Elasticity of Demand
(𝜀!" )
u It measures the responsiveness or the sensitivity of
changes in the quantity demanded of product 𝑋 (𝑄𝑑! ) to
price changes for product 𝑌 (𝑃" ) .
u It can be computed using the point formula,
%∆𝑄𝑑! ∆𝑄𝑑! 𝑃"#
𝜀!" = = ×
%∆𝑃" ∆𝑃" 𝑄𝑑!#
or the midpoint (arc) formula,
∆𝑄𝑑! 𝑃"# + 𝑃"%
𝜀$ = ×
∆𝑃" 𝑄𝑑!# + 𝑄𝑑!%
 Interpreting the Cross-Price
Elasticity of Demand (𝜀!" )
u It gives the percentage change in quantity demanded of
product X for every 1% change in the price of product Y.
u If 𝜀!" is positive, products 𝑋 and 𝑌 are referred to as
substitutes for each other.
u If 𝜀!" is negative, products 𝑋 and 𝑌 are referred to as
complementary.
u If 𝜀!" is zero, products 𝑋 and 𝑌 are unrelated.
 Problem:
Cross-Price Elasticity of Demand

Sungsam manufactures a line of microwave ovens that cost P12,500.

Its sales have averaged about 6,000 units per month during the past
year. In June, Sungsam’s closest competitor, GL, reduced its price for
a closely competitive model from P14,000 to P11,000. Sungsam
noticed that its sales volume declined to 4,500 units per month after
GL announced its price cut.

1) What is the cross-price elasticity of demand between Sungsam’s

oven and the competitive GL model?
2) What is the interpretation of the coefficient from number (1)?
 AB 301
ELASTICITY

Price Elasticity of Supply

 Price Elasticity of Supply (𝜀# )

u It measures the responsiveness or the sensitivity of the

quantity of a good supplied to the price of that good.
u It can be computed using the point formula,
%∆𝑄𝑠 ∆𝑄𝑠 𝑃#
𝜀& = = ×
%∆𝑃 ∆𝑃 𝑄𝑠#
or the midpoint (arc) formula,
∆𝑄𝑠 𝑃# + 𝑃%
𝜀' = ×
∆𝑃 𝑄𝑠# + 𝑄𝑠%
 Price Elasticity of Supply:
Degrees
Elastic Inelastic Unitary Elastic
Supply is elastic if a Supply is inelastic if a Supply is unitary elastic
specific percentage specific percentage if a specific percentage
change in price change in price change in price
produces a larger produces a smaller produces the same
percentage change in
quantity supplied. percentage change in percentage change in
quantity supplied. quantity supplied.

𝜺𝑺 > 1 𝜺𝑺 < 1 𝜺𝑺 = 1
Price Elasticity of Supply:
Extreme Cases
Perfectly Elastic
Supply is perfectly elastic if
quantity supplied is extremely
responsive to even very small
changes in price.
Perfectly Inelastic
Supply is perfectly inelastic if
quantity supplied is totally
unresponsive to any changes in
price.

Price Price
𝑆

P 𝑆

𝜺" = ∞ 𝜺" = 0

Quantity Quantity