The Concept of Elasticity

There are several factors affecting the consumers in deciding how many of a commodity Graphical illustration of the different types of price demand elasticity
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 other 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 in the price of the product. 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.

Why do we use elasticity instead of slope?

Slope = -6 means that for every one unit increase in the price, the quantity demanded
will decrease by 6 units.
B. Income elasticity. It measures the consumer's responsiveness or reaction to
For example, the commodities are YI and Pencil. changes in his income. It is obtained by getting the quotient of the percentage change in
Car: a one peso (lP) increase in the price of car will mean a decrease in the demand for the income.
cars by 6 units.
Pencil: a one peso (lP) increase in the price of pencil will mean a decrease in the
.
demand for pencils by 6 units.
Analysis: The responsiveness of the consumer on a peso (lP) increase for the two
commodities cannot be compared because 6 units of cars and 6 units of pencils are
entirely different.
Price elasticity = -1.2 means that for every one percent increase in the price of
commodity X, the quantity demanded will decrease by 1.2 percent. The consumer is
said to be highly responsive (elastic) to changes in the price of the commodity.

For example, the commodities are YI and Pencil.

Car: a one percent increase in the price (1%) of the car will mean a 6 percent (6%),
decrease in the demand for it.
Pencil: a one percent (1%) increase in the price of pencil will mean a 6 percent (6%)
decrease in the demand for it.
Analysis: Since the comparison is interms of percent change and not the units of
commodities,the comparison is understandable.

Values and Types of Elasticity

/El = 1 Unitary Elastic, that is when % Q = % P
/ El > 1 Elastic, that is when % Q > % P
IE/ < 1 Inelastic, that is when % Q < % P
/ El = 0 Perfectly Inelastic Interpretation of the income elasticity = 1.5
IE/ = a Perfectly Elastic
This means that for every one percent increase in the income of the consumer, the
quantity demanded will 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 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.
Values and Types of Elasticity
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 related commodities.

Graphical illustration of the different types of price supply elasticity is shown in

Figure 15.

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

Supply Elasticity
Suppl y elasticity measures the degree of seller's responsiveness or reaction to changes
in the factors affecting supply.
Price supply elasticity measures the seller's responsiveness reaction to changes in
the price of the product. It is obtained by getting the quotient of the percentage change
in the quantity supplied in response to a given percentage change in the price.

Supply price elasticity = 3 means that for every one percent increase in the
price
of commodity X; the quantity supplied will increase by 3 percent.
The seller is said to be highly responsive (elastic) to changes in the price
of the commodity.