Name: Camille P.

Guetan
Course/Year: BSBA 3 Business Economics
Topic: Chapter 3 Elasticity and Its Applications

DISCUSSION
In the earlier chapter we learn that the quantity demanded of goods and services
is affected by their price, the consumer’s income, the services, the prices of other
goods, taste and preference, expectations, and population. The previous chapter only
gives us a prediction of things that are likely to happen if income, technology, or other
factors that affect demand and supply will exist.
We come now to our next topic, the Elasticity. The Elasticity is a measure of one
variable over the other. Mathematically speaking, if there are two variables, a and b,
then we can say that the “a elasticity of factors that affect b “ is the percent increase in b
assuming all other factors that affect b are constant.
We will discuss about the four types of elasticity to which price can affect supply,
which covers: Price elasticity of demand, income elasticity of demand, cross-price
elasticity of demand, and price elasticity of demand.

 Price Elasticity of Demand (PED)

The measure of how much the quantity demanded of a good responds to a
change in the price of that good.
The measure of percent decease in the quantity demanded of goods and
services when there is a percent increase in their price.
Equation 3.1
PED = % QD

% P

% QD is the Percent Change in Quantity Demand

% P is the Percent Change in Price

`We can read this formula as the absolute value of the percent change in quantity
Demand divided by the percent Change in Price

Equation 3.2
QD2 - QD1
QD1
PED = P 2 - P1
P1

Graphical Representations of PED

The section will discuss five types of graphical representation of a PED. These
are: (1) PED Perfectly Inelastic Demand, (2) PED with Inelastic Demand, (3) PED with
Unit Elastic Demand, (4) PED with an Elastic Demand, and (5) PED with Unit Elastic
Demand.

1. Perfectly inelastic Demand

The commodities with an elasticity of Zero. This means that even if the price
changes, the quantity demand would still remain the same.
2. PED with Inelastic Demand
3. PED with Unit Elastic Demand
4. Perfectly Elastic Demand
Is a commodity with an elasticity that equals to infinity

 Income Elasticity of Demand (IED)

The measure of how much the quantity demanded of a good responds to a
change in costumer’s income, computed as the percentage change in quantity
demanded divided by the percentage change in income. We can compute for IED using
the equation 3.4:

% QD
IED =
% I

% QD is the Percentage Change in Quantity Demand

% I is the Percent Change in income

We can red this as value of the percent in quantity Demand divided by the
percent Change in Income.
Equation3.5

Q2 -Q1
Q1
IED=
I2 - I1
I1

 Cross-price Elasticity of Demand (CPED)

The measure of how much the quantity demanded of one good responds to a
change in the price of another good, computed as the percentage change in quantity
demanded of the first good divided by the percentage change in the price.
Equation 3.7;

% QD y
CPED =
% Px

% QD y is the Percent Change in Quantity Demand of commodity Y

% Px is the Percent Change in Price of Commodity X. In our Discussion of the

price.
We can read this as value of the Percent Change in Quantity Demand of
commodity Y divided by the percent Change in Price of commodity X.
Using Midpoint Formula on CPED
Just like in PED and IED, using midpoint formula is preferable when you would
like to get an answer regardless of the direction of the change.
QDy2 - QDy1

(QDY2 + QDY1) /2
CPED =
Px2 - Px1
(Px2 - Px1 ) /2

 Price Elasticity of Supply (PES)

The measure of how much the quantity supplied of a good responds to a change
in the price of the second good.

% QS
PES =
% P
% QS is the Percent Change in Quantity Supply

% P is the Percent Change in Price

We can read this formula as the absolute value of the percent
Change in Quantity Supply divided by the Percent Change in Price.
Equation 3.11:
QS2 - QS1
PES = QS1
P2-P1
P1
Graphical Representations of PES
There is five graphical representations for PES. These are: (1) PES with perfectly
Inelastic Supply, (2 PES with Inelastic Supply, (3) PES Unit Elastic Supply, (4) PES
with Elastic Supply, and (5) PES with Perfectly Elastic Supply.