Group 3 - Elasticity Concept

Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND SATELLITE
CAMPUSES STO. TOMAS BRANCH
LESSON MANUSCRIPT
ELASTICITY CONCEPT
ECON 011 – PRINCIPLES OF ECONOMICS
SUBMITTED TO:
Mr. Marlon P. Tuiza
BY:
Enriquez, Jerick V.
Ondo, Lei Julianna D.
Regalado, Kyla M.
Singsing, Aliyah Cassandra R.
Tolica, Rose Angeline M.
BSIE 2-1
GROUP 3
LESSON MANUSCRIPT
ELASTICITY CONCEPT
LEARNING OBJECTIVES:
 Define the concept of elasticity of demand and supply and explain its importance in
economics.
 Identify the factors that affect the elasticity of demand and supply and explain how
they impact market behavior.
 Apply the concept of elasticity to real-world scenarios and analyze how changes in
price or other external factors affect demand and supply.
INTRODUCTION
ELASTICITY
- Measures of responsiveness
- Ratio of one variable’s percent change to another variable’s percent change.
- The key thing to understand is that we use elasticity when we want to see how one thing
changes when we change something else.
- It differs between products because some might be more necessary to the consumer.
- It is frequently used in demand analysis to quantify the impact of changes to the factors
that influence demand.
- Used in production and cost analysis to assess how changes to input affect output and
how changes to output affect costs.
DEMAND
- It is the willing to purchase at various prices during period of time.

- According to Ferguson, demand refers to the quantities of commodity that the consumers
are able to buy at each possible price during a given period of time, other things being
equal.
- According to B.R. Schiller, demand is the ability and willingness to buy specific quantity of
a good at alternative prices.
Elasticity shows how sensitive quantity is to a change in price it answers the question “By
How Much”. It is the responsiveness of the quantity demanded of a good to change on one
of the variables on which demand depends.
A. DEMAND ELASTICITY
- It refers to the change in demand when there is a change in another economic factor,
such as price or income. It measures the change in demand when the price or other
factors change. An elastic demand is one which the change in quantity demanded due to
a change in price is large.
- Demand can be classified as elastic, inelastic or unitary.
Examples of Elastic Demand:
Consumer durables: Items that are purchased frequently and can be postponed if price
rises. The elasticity of demand is impacted by close replacements for a good. Consumers will
rapidly convert to the alternative product if the price of your product rises or the price of the
alternative product falls if another product can be easily substituted for it. For instance, all meat
items, including beef, pork, and chicken. Recent years have seen a decrease in the price of
poultry, which has led to a rise in the consumption of poultry at the expense of beef and pork.
Products with similar replacements so frequently have elastic demand.
Example:
Example of computing elasticity of demand using the formula. When the price decreases
from $10 per unit to $8 per unit, the quantity increases from 30 units to 50 units. The elasticity
coefficient is 2.25.
Causes of elasticity of demand

- Price ranges, the nature of the good or service, income levels, and the presence of any
prospective alternatives. Consumers are likely to purchase items at a reduced cost if
prices decline.
Important Key Points that determine the elasticity of demand:
1. Luxury or Necessity Goods – Luxury goods tend to have an elastic demand, while
necessity goods have an inelastic demand. Purchasers can stop buying the luxury goods
when their prices rise.
2. Percentage of Income – Big items in a budget tend to have a more elastic demand than
small item. For example, consumers may be affected by a 1 per cent rise or fall in price of
a flat but are insensitive to such fluctuations in pens.
3. Substitute – Items that can be substituted easily have a more elastic demand than those
that cannot.
4. Time – The demand for a product becomes more elastic the longer the time period under
consideration. It takes time to decide about another product before buying it as one
develops a habit of using a particular product.
I. PRICE DEMAND ELASTICITY
Measured as a percentage change in quantity demanded divided by the percentage change

in price, other things remaining same.
Price elasticity of demand is the ratio of the percentage change in quantity demanded of
a product to the percentage change in price. Economists employ it to understand how supply and
demand change when a product's price changes.
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.
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
Example of Price Elasticity of Demand
Fast food is another price elastic product example because it is a discretionary expense
that people can easily avoid if the price becomes too high. When the cost of fast-food increases,
consumers may choose to cook at home or opt for cheaper alternatives. On the other hand, when
fast food prices fall, demand usually increases.
II. INCOME ELASTICITY OF DEMAND
It measures the responsiveness of the quantity demanded to a change in consumer income.
Example:
When consumer income falls, quantity demanded decreases as consumers are able to
afford less due to their lower income. The reverse is also true. When consumer income rises,
quantity demanded increases as consumers are able to afford more at higher income.
The formula for the Income Elasticity of Demand is:
YED = %∆ Quantity Demand / %∆ Income
Example:
Due to a 10% pay raise, Regie's monthly income increases. He chooses to spend 20% more
in one month than usual since he wants to buy a few minor household appliances. His income
elasticity of demand for small domestic appliances that month is then equal to:
Solution:
YED = %∆ Quantity Demand / %∆ Income
= 20% / 10% = 2
Formula for finding the percentage change in a variable:
%∆ = (New Value - Old Value / Old Value) (100%)
There are two types of goods depending on how their quantity demanded reacts to changes in
consumer income:
 Normal Goods – It is a good that is demanded more as consumers’ income increases. This
means that as consumer income rises, they demand more of a normal good. The income
elasticity of demand for a normal good is, therefore, positive.
Example:
Most food is a normal good. As consumer income increases, the demanded quantity of
food increases as well.
Normal goods can be divided into two categories depending on the value of the income
elasticity of demand:
 Necessities – For necessities, the income elasticity of demand will take the values
between 0 and 1. It required for consumption, which makes them less sensitive to income
changes. They are goods without which people would have problems subsisting, making
those goods’ income inelastic.
 Luxuries – For luxuries, the income elasticity of demand will take values greater than
one. It is not required for consumption, which makes them more sensitive to income
changes. They are goods without which people would not have a problem subsisting,
making those goods income elastic.
Note: Both necessities and luxuries will have a positive income elasticity of demand.
 Inferior Goods – It is a good that is demanded less as consumers’ income increases.

Inferior goods are different. As consumer income rises, they demand less of an inferior
good. The income elasticity of demand for an inferior good is, therefore, negative.
Example:
Canned meats tend to be an inferior good: their price is relatively low, which makes them
affordable. However, as consumer income increases, they substitute the cheaper canned meat
for more expensive fresh meat. This leads to a fall in the demanded quantity of canned meat.
III. CROSS-PRICE ELASTICITY
The term "cross elasticity of demand" also referred to as "cross-price elasticity of demand" is
a measure of the responsiveness of the demanded quantity of one good to a change in the price
of another good.
Note: The price elasticity of demand measures the responsiveness of the demanded quantity of
one good to the changes in the price of that same good. In contrast, cross-price elasticity of
demand measures the responsiveness of the demanded quantity of one good to changes in the
price of another good, such as a substitute or a complement.
There are types of Cross Elasticity of Demand:
The value of the cross elasticity of demand will depend on whether the goods are
substitutes, complements, or goods with no apparent relationship.
 Substitute goods – Are goods that consumers consider to be identical or similar enough
for interchangeable consumption.
Example:
Consider the demand for substitutes such as white potatoes and sweet potatoes. One
day, the price of white potatoes rises significantly, and you decide that you want to substitute
your white potato consumption with sweet potato consumption. Your quantity demand for white
potatoes will decrease, leading to an increase in the demanded quantity of sweet potatoes.
 Complementary goods – Are goods that are consumed jointly or in joint demand.
Example:
Consider the demand for complements such as mobile phones and sim cards.
Technological advances led to mobile phones being widely accessible at a lower price. This led to
an increase in the demanded quantity for phones, leading to an increase in the demanded
quantity for sim cards.
 Goods with no apparent relationship – Goods that are neither substitutes nor
complements are considered unrelated. In other words, there is no relationship between
these goods as they are independent of one another. The value of the cross elasticity of
demand between such goods is equal to zero.
The formula for the cross-price elasticity of demand (XED):
XED = %∆ Quantity Demand of Good A / %∆ Price of Good B

B. SUPPLY ELASTICITY
- The elasticity of supply measures how much the quantity supplied of a good or service
changes when there is a price change.
- The amount by which the quantity supplied increased or decreased with the price change
depends on how elastic the supply of a good is.
- The ability of suppliers to alter the quantity of a good they produce directly impacts the
degree to which the quantity supplied can change in response to a change in price.
I. Price Supply Elasticity
The elasticity of supply definition is based on the law of supply, which states that the number
of goods and services supplied will usually change when prices change.
The price elasticity of supply is the percentage change in quantity supplied divided by the
percentage change in price. It also measures the responsiveness of quantity supplied to changes
in price. The price elasticity of supply is greater when the length of time under consideration is
longer because over time producers have more options for adjusting to the change in price.
When applied to labor supply, the price elasticity of supply is usually positive but can be
negative. If higher wages induce people to work more, the labor supply curve is upward sloping
and the price elasticity of supply is positive. In some very high-paying professions, the labor
supply curve may have a negative slope, which leads to a negative price elasticity of supply.
Elasticity = % Change in quantity

% Change in price
Assume that an apartment rents for $650 per month and, at the 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?
We'll start by using the Midpoint Method to calculate percentage change in price and quantity:
Next, we take the results of our calculations and plug them into the formula for price elasticity
of supply:
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.
C. VALUES AND TYPES OF DEMAND AND SUPPLY ELASTICITY
DEMAND
I. Perfectly Elastic Demand
Occurs when a slight price increase leads to a total drop in demand, and a small rise price
decrease results in an infinite increase in demand. It represents a situation where even a small
price change has an extreme impact on the product's demand. The numerical value for perfectly
is ep= ∞
The slope of the demand curve for a perfectly elastic demand is horizontal.
Example:
The price of a cup of coffee increases by $0.20, consumers might decide to instead buy
tea of coffee. Coffee is an elastic product because a small increase in the price dropped the
quantity demanded.
II. Perfectly Inelastic Demand
Perfectly inelastic demand refers to a situation where the quantity demanded for a
product remains constant regardless of changes in its price. The numerical value for perfectly
inelastic demand is zero (ep=0).
The slope of the demand curve for a perfectly elastic demand is vertical.
Example:
Emergency services, electricity, drugs, and essential food item have perfectly inelastic
demand. The price of food item may increase or decrease; there will be no change in the demand
for such goods and services.
III. Relatively Elastic Demand
When the proportionate change in demand exceeds the proportionate change in the good's
price, the demand is said to be relatively elastic. The range of moderately elastic demand's
numerical value is from one to infinity.
The demand curve of relatively elastic demand is gradually sloping.
Example:
For example, the price of a particular brand of cold drink increases from Rs. 15 to Rs.
20. In such a case, consumers may switch to another brand of cold drink. However, some of
the consumers still consume the same brand. Therefore, a small change in price produces a
larger change in demand of the product.
IV. Relatively Inelastic Demand
When demand for a good is generally inelastic, the proportionate change in quantity
required is not greater than the proportionate change in price.
The demand curve of relatively elastic demand is rapidly sloping.

Example:
Calculate the price elasticity of demand and determine the type of price elasticity.
Solution:
P= 15
Q = 100
P1 = 20
Q1 = 90
Therefore, change in the price of milk is:
∆P = P1 – P
∆P = 20 – 15
∆P = 5
Similarly, change in quantity demanded of milk is:
∆Q = Q1 – Q
∆Q = 90 – 100
∆Q = -10
The change in demand shows a negative sign, which can be ignored. This is because of the
reason that the relationship between price and demand is inverse that can yield a negative
value of price or demand.
Price elasticity of demand for milk is:

ep = ∆Q/∆P * P/Q
ep = 10/5 * 15/100
ep = 0.3
V. Unitary Elastic Demand
Demand is said to be unitary elastic when a proportionate change in demand results in

an equal change in the product's price. The numerical value for unitary elastic demand is
equal to one (e p=1).
The demand curve for unitary elastic demand is represented as a rectangular hyperbola.
Example:
The price of a mobile phone increases by 10%, the quantity demanded will decrease by
10%, and vice versa.
SUPPLY
I. Perfectly Elastic Supply

Describes a circumstance in which a product's supply totally grows or decreases in
response to a proportionate change in price. This situation is hypothetical since there is no
such thing as a product whose supply is perfectly elastic (eS = 00); instead, the numerical
value of supply elasticity extends from zero to infinity in this case.
Let's use an illustration to better comprehend the idea of completely elastic demand.
The supply curve for product X is shown in Figure-15:

II. Perfectly Inelastic Supply:
Refers to an instance where the quantity supplied remains constant despite a

proportionate increase or decrease in the price of a good. In such a scenario, the amount
supplied remains constant across all price changes. The supply elasticity has a numerical
value of zero.
Example:
The quantity supplied and the price of product R is shown in Table-13:
The supply curve for product R is shown in Figure-19:

III. Relatively Elastic Supply:
Refers to a situation where a product's price changes proportionally, but the quantity
supplied changes proportionately more. It is said to have a moderately elastic supply when
the amount supplied increases by 30% in response to a 10% change in a product's price
(eS>1). An example is used to clarify the idea of relatively elastic supply.
Example:
The quantity supplied and the price of product P is shown in Table-10.
The supply curve for product P is shown in Figure-16:

IV. Relatively Inelastic Supply:
When the relative change in the quantity supplied is smaller than the proportionate
change in the price of a product. The elasticity of supply in this situation is less than one
(eS<1). If the amount supplied rises by 20% in comparison to a 30% change in a product's
price, for example, the supply elasticity would be less than unit.
Example:
The quantity supplied and the price of product Z is shown in Table-11:
The supply curve for product Z is shown in Figure-17:

V. Unitary Elastic Supply:
Refers to a circumstance where the proportionate change in the quantity supplied is

equal to the proportional change in a product's price. Unit elastic supply has an
absolute value of one (eS=1).
Example:
The quantity supplied and the price of product Y is shown in Table-12:
The supply curve for product Y is shown in Figure-18:

REFERENCES:
Don Hofstrand (2020). “Elasticity of Demand”,

https://www.extension.iastate.edu/agdm/wholefarm/html/c5-207.html
“Law of Demand and Elasticity of Demand”,

https://www.jandkicai.org/pdf/16781demand_n_elasticity.pdf
OpenStax College (n.d). “Price Elasticity of demand”, www.khanacademy.org
N.D “6 Price Elasticity”, https://www.symson.com/blog/6-price-elasticity-of-demand-examples
N.D “Income and Cross Price Elasticity”,

https://www.studysmarter.co.uk/explanations/microeconomics/supply-and-demand/income-
elasticity-of-demand/?fbclid=IwAR0KMmMDGYdCTeQ-
MUvVFkFFqm32yRG7ilO1zloxsRfaOjtSoCVfnh1NyKo
N.D “Elasticity of Supply: Types, Methods and Factors”,

https://www.economicsdiscussion.net/elasticity-of-supply/elasticity-of-supply-types-
methods-and-
factors/3549?fbclid=IwAR0oFEOEzWKpP9UhN8nbyJ51djWbFNMEC64aTissCZBx4HM3eO5L
DKm7xao
Nitisha. N.D “5 Types of Price Elasticity of Demand”, www.economicsdiscussion.net
Ritesh Pathak (2021). “Elasticity of Demand and its Types”,

https://analyticssteps.com/blogs/elasticity-demand-and-its-
types?fbclid=IwAR1gZdFufMEoQHnPgJpPif_d7f5DdrryHEqLOyu9qIgz__iJraF8VoSnhYU
Nitisha. “Elasticity of Supply: Types, Methods and Factors”, www.economicsdiscussion.net
“The Concept of Elasticity of Demand and Why it is Important for a Firm to have The Knowledge
of Price Elasticity of Demand”, www.researchgate.net

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Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

- It is the willing to purchase at various prices during period of time.

Examples of Elastic Demand:

Causes of elasticity of demand

Important Key Points that determine the elasticity of demand:

I. PRICE DEMAND ELASTICITY

Measured as a percentage change in quantity demanded divided by the percentage change

Price elasticity measures the responsiveness of the quantity demanded or supplied of a

Example of Price Elasticity of Demand

II. INCOME ELASTICITY OF DEMAND

It measures the responsiveness of the quantity demanded to a change in consumer income.

The formula for the Income Elasticity of Demand is:

YED = %∆ Quantity Demand / %∆ Income

YED = %∆ Quantity Demand / %∆ Income

Formula for finding the percentage change in a variable:

%∆ = (New Value - Old Value / Old Value) (100%)

 Inferior Goods – It is a good that is demanded less as consumers’ income increases.

III. CROSS-PRICE ELASTICITY

There are types of Cross Elasticity of Demand:

The formula for the cross-price elasticity of demand (XED):

XED = %∆ Quantity Demand of Good A / %∆ Price of Good B

I. Price Supply Elasticity

Elasticity = % Change in quantity

C. VALUES AND TYPES OF DEMAND AND SUPPLY ELASTICITY

I. Perfectly Elastic Demand

II. Perfectly Inelastic Demand

III. Relatively Elastic Demand

The demand curve of relatively elastic demand is gradually sloping.

IV. Relatively Inelastic Demand

The demand curve of relatively elastic demand is rapidly sloping.

Price elasticity of demand for milk is:

V. Unitary Elastic Demand

Demand is said to be unitary elastic when a proportionate change in demand results in

I. Perfectly Elastic Supply

The supply curve for product X is shown in Figure-15:

II. Perfectly Inelastic Supply:

Refers to an instance where the quantity supplied remains constant despite a

The quantity supplied and the price of product R is shown in Table-13:

The supply curve for product R is shown in Figure-19:

III. Relatively Elastic Supply:

The quantity supplied and the price of product P is shown in Table-10.

The supply curve for product P is shown in Figure-16:

IV. Relatively Inelastic Supply:

The quantity supplied and the price of product Z is shown in Table-11:

The supply curve for product Z is shown in Figure-17:

V. Unitary Elastic Supply:

Refers to a circumstance where the proportionate change in the quantity supplied is

The quantity supplied and the price of product Y is shown in Table-12:

The supply curve for product Y is shown in Figure-18:

Don Hofstrand (2020). “Elasticity of Demand”,

“Law of Demand and Elasticity of Demand”,

OpenStax College (n.d). “Price Elasticity of demand”, www.khanacademy.org

N.D “6 Price Elasticity”, https://www.symson.com/blog/6-price-elasticity-of-demand-examples

N.D “Income and Cross Price Elasticity”,

N.D “Elasticity of Supply: Types, Methods and Factors”,

Nitisha. N.D “5 Types of Price Elasticity of Demand”, www.economicsdiscussion.net

Ritesh Pathak (2021). “Elasticity of Demand and its Types”,

Nitisha. “Elasticity of Supply: Types, Methods and Factors”, www.economicsdiscussion.net

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