Elasticity of Demand and Supply

Introduced By:

Hazem Amin Ibrahim Mahmoud

MBA Group 233
Academic Number :
22221035152

Presented to:
Dr. Heba Elnasharty

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 1. Means Of Conseiderations

The most common use of this is the concept of elasticity to predict what will happen if the
price of goods / services is increased . Knowledge of how large the impact of price
changes on demand or offer is very important .
We know that the elasticity measures how sensitive we are to price changes . If the price
of care is very little , only price changes will have little impact on our willingness to buy
or sell . Because the percentage change in quantity demanded and supplied will be small ,
the calculation of elasticity also be small .
Understanding the elasticity is much more than an intellectual exercise , but rather make
or break a commercial venture . For example , a seller of food when he was no longer
able to attract enough customers to eat at the restaurant and meeting their needs with his
efforts he will be moved to various forms such as sitting on the floor and lower the price
of cooking . Further lower prices attract the attention of new customers and the food
businesses into thriving in the new environment .
For the manufacturer , this concept is used as a guideline how much he had to change
the price of its product . It is closely related to how much sales revenue he would get.
Because , according to the law of demand the greater the price of goods will decrease the
market demand , in turn, the smaller the price of goods , the demand will be growing .
However , if the increase in demand has resulted in reducing the number of production
and the amount of debt compared to income of the producers could suffer losses . Well ,
it's all in order to predict the absence of excessive loss or gain is used the concept of
elasticity .

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2. Using Of Elasticity
a. An elasticity is a unit-free measure.
b. By comparing markets using elasticities it does not matter how we measure
the price or the quantity in the two markets.
c. Elasticities allow economists to quantify the differences among markets
without standardizing the units of measurement.
d. As a foundation in developing an enterprise IT sales if known demand
responsive nature of the production (supply) of the company, the company can
decide whether to raise the sales proceeds should increase production or not.
e. government as a tool to predict success of certain economic policies that will
be implemented. For example, to reduce the import of a particular type of
goods the government needs to know the effect on the demand for imported
goods is a result of policies that affect the level of prices of imported goods.

3. Definitions:

- Elasticity: can called responsiveness measure, it’s demand and supply

responsiveness clearly matters for a lots of market analysis.

Elasticity is the ratio of the proportional change from a variable to changes

in another variable or the effect of price changes on the quantity of goods
demanded or offered.In a simple sentence can be formulated :

Or can be used of :

P1 ∆Q
E = ---- . ------
Q1 ∆P

note :
E : Elasticity
P : Price
Q : Quantity

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 - Price Elasticity of Supply and Demand:

Both demand and supply curves show the relationship between price and
the number of units demanded or supplied. Price elasticity is the ratio
between the percentage change in the quantity demanded (Qd), or supplied
(Qs), and the corresponding percent change in price.

- The price elasticity of demand:

is the percentage change in the quantity demanded of a good or service

divided by the percentage change in the price.

- The price elasticity of supply:

is the percentage change in quantity supplied divided by the percentage

change in price.

4. Elasticities can be usefully divided into five broad categories:

- perfectly elastic, elastic, perfectly inelastic, inelastic, and unitary.
- An elastic demand or elastic supply is one in which the elasticity is
greater than one, indicating a high responsiveness to changes in price.
- An inelastic demand or inelastic supply is one in which elasticity is less
than one, indicating low responsiveness to price changes.
- Unitary elasticities indicate proportional responsiveness of either demand
or supply.
- Perfectly elastic and perfectly inelastic refer to the two extremes of
elasticity.
 Perfectly elastic means the response to price is complete and infinite: a
change in price results in the quantity falling to zero.
 Perfectly inelastic means that there is no change in quantity at all when
price changes.

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Calculating price elasticity of demand
Let’s apply these formulas to a practice scenario. We'll calculate the
elasticity between points A& B in the graph below.

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Calculating the price elasticity of supply
Now let's try calculating the price elasticity of supply. We use the same
formula as we did for price elasticity of demand:

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Assume that an apartment rents for $650 per month and, at that price,
10,000 units are rented—you can see these number represented graphically
below. When the price increases to $700 per month, 13,000 units are
supplied into the market.

By what percentage does apartment supply increase? What is the price

sensitivity?

The graph shows an upward sloping line that represents the supply of
apartment rentals.

We'll start by using the Midpoint Method to calculate percentage change in

price and quantity:

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Again, as with the elasticity of demand, the elasticity of supply is not
followed by any units. Elasticity is a ratio of one percentage change to
another percentage change—nothing more. It is read as an absolute value.
In this case, a 1% rise in price causes an increase in quantity supplied of
3.5%. The greater than one elasticity of supply means that the percentage
change in quantity supplied will be greater than a one percent price
change.

Summary
 Price elasticity measures the responsiveness of the quantity
demanded or supplied of a good to a change in its price. It is
computed as the percentage change in quantity demanded—or
supplied—divided by the percentage change in price.
 Elasticity can be described as elastic—or very responsive—unit
elastic, or inelastic—not very responsive.
 Elastic demand or supply curves indicate that the quantity demanded
or supplied responds to price changes in a greater than proportional
manner.
 An inelastic demand or supply curve is one where a given
percentage change in price will cause a smaller percentage change in
quantity demanded or supplied.
 Unitary elasticity means that a given percentage change in price
leads to an equal percentage change in quantity demanded or
supplied.