Subject:

Microeconomics

Rhodora G. Pagatpat
 ELASTICITY

What is elastic?
 It is a term used in economics to describe a change in the
behavior or buyers and sellers in response to a single variable like
a change in price or other variables for a good or service.
 Demand elasticity or inelasticity for a product or good is
determined by how much demand for the product changes as
the price increases or decreases.
 An inelastic product is one that consumers continue to purchase
even after a change in price.
 Product or services that are elastic are either unnecessary or can
be easily replaced with a substitute,
2 major types of elasticity

PRICE ELASTICITY OF DEMAND

Measures the responsiveness of a markets demand to change
in price of a particular good or service.

PRICE ELASTICITY OF SUPPLY

Measures the responsiveness of a market’s supply to change in
price of a good or service.
 Understanding Elasticity in economics

1. The rubber band analogy

Elasticity is like the rubber band’s responsiveness to
stretching. A product or service with elastic demand is like a
stretchy rubber band. In elastic demand, when the price
changes, consumers quickly adjust their buying behavior, just
as the rubber band stretches easily when pulled.

A product with inelastic demand is like a rubber band

that doesn’t stretch much. We call rubber bands “inelastic”
when they aren’t easily stretched. Inelastic demand means
that consumers are not very responsive to price changes,
meaning they will buy the good or service no matter how
expensive it gets. This is similar to how the rubber band
doesn’t stretch much when being pulled
 Understanding Elasticity in economics

2. The movie theater analogy

Another way of understanding elasticity is through
the lens of going to the movies.
Scenario1:
Imagine you are a huge fan of The Avengers and
are excited to see the latest movie release. You are willing to
pay for a premium/high price to see it opening night. This
illustrate the inelastic demand because your desire to see the
movie remains strong even with a higher ticket price.

Scenario 2:
You are interested in seeing the movie but are not
particularly attached to the franchise so won’t mind seeing it
at a later date. It this case you might choose to wait for a
lower- priced screening. This demonstrates elastic demand as
your willingness to see the movie is sensitive to price.
 Understanding Elasticity in economics
3. The t-shirt analogy
T-shirt from the perspective of supply.
Imagine you are a t-shirt vendor and you have a group
of production team.
Scenario 1:
Your production team uses a series of machine to mass
produce t-shirts and can quickly respond to changes in market t-
shirt prices by adjusting the number of t-shirt they produce. As
the price of t-shirt in the market increases, your production team
produces more to make more profits. This represents elastic
supply because you can easily expand or reduce production
based on market condition.

Scenario 2:
Your production team creates handmade limited edition t-
shirts that require significant time and effort. Even if the
demands for t-shirts increases in the market , which increase their
price, your team doesn’t have the machinery to increase
production significantly. This represent inelastic supply because
you cannot rapidly change production due to manufacturing
constraints
Price elasticity of Demand
 Price elasticity of Demand
 If the quantity demanded of a product changes
greatly in response to change in its price, it is elastic.
Meaning the demand point for the product is
stretched far from its prior point.

 If the quantity purchased shows a small change after

a change in its price, it is inelastic. Meaning the
quantity didn’t stretch much from its prior point.

 Price elasticity of demand demonstrate how a

change in price affects the quantity demand.

“ It is the ratio of the percentage change in quantity

demanded of a product to the percentage change in
price.”
 Price elasticity of Demand

 When the price elasticity of demand is greater than one,

the good is considered to demonstrate elastic demand.
 When the quantity demanded drops to zero with a rise in
price, that demand is perfectly elastic.

 When the price elasticity of demand is less than zero, the

good is considered to show inelastic demand.
 When the quantity demanded does not respond to a
change in price, it is said that the demand is perfectly
inelastic.
 Price elasticity of Demand

 Example: Clothing company raised price of t-shirt

from P 100 to P110. The price increase is 110-100 or
10%. This increase caused a decrease in demand
from 1000 t-shirt to 950 t-shirt. The percentage
decrease in demand is -5%.

-.5%____ = .5
.10%
NOTE: due to the price increase the firm’s revenue
increases by 4,500
110 X 950 = 104,500 from the original price point of
100 X 1000 = 100,000
 Factors that affect price elasticity of
demand
Availability of substitutes
The more easily a consumer can substitute one product for
another, then the price elasticity of demand would be considered to
be elastic. If the consumer are unable to substitute a good, the
good would experience inelastic demand
Ie. If the price of coffee goes up, people will have no problem
switching to tea, and the demand for coffee will fall. This is because
coffee and tea are considered good substitute for each other

Urgency
The more discretionary (voluntary) a purchase is, the more
its quantity of demand will fall in response to price increases.
Meaning the product demand has greater elasticity.
Ie. You are considering to buy a new refrigerator but the current one
still works its just outdated and old. If the price of a new refrigerator
goes up, you’re likely to forego that immediate purchase and wait
until prices go down or the current machine breaks down
 Factors that affect price elasticity of
demand
Duration of Price Change
Demand response to price fluctuations is different for a
one-day sale than for a price change that lasts for a season or a
year. Consumer may accept a seasonal price fluctuation rather
than change their habits.
Simply put, the pace at which the consumer can switch to
another alternative and adjust their consumption habits.

Income spent on the good

Price elasticity of demand tends to be low when spending
on a good is a small proportion of their available income.( this is true
for the high-income consumers) A change in the price of a good
exerts a very little impact on the consumer’s tendency to consume
the good.
When a good represents a large chunk of the consumers
income ( this is true for the low-income level groups) the consumer is
said to possess a more elastic demand.

BRAND LOYALTY
What makes a product elastic?
If a change for a product causes a substantial change
in either its supply or its demand, it is consider elastic. It means
that there are acceptable substitutes for the product.
Example: cookies, luxury automobiles, coffee

What makes a product inelastic?

If a price change for a product doesn’t lead to much,
change in its supply or demand, it is considered inelastic. It
means that the product is considered to a necessity or a luxury
item for addictive constituents
Example: gasoline, milk and iPhones.
Importance of Price Elasticity of Demand

 It allows someone selling that good to make informed

decisions about pricing strategies.

 It provides seller with information about consumer

pricing sensitivity,

 It is also key for makers of goods to determine

manufacturing plans.

 For governments to asses how to impose taxes on

goods
Common Elasticity of Demand examples

 1. Luxury Goods - they are not essentials that people

need to survive. When the price of these items
increases, buyer may delay their purchases or will look
for a more affordable alternatives.
 2. Airline tickets – when airfare increases, consumer
may decide to postpone their travel plans or look for
alternative means of transportation.
 3. Fastfood - if the price of product offered by FF
increases, consumers may choose to cook at home or
look for a cheaper alternative.
 4. Gasoline - when the price of gasoline increases,
people may choose to carpool or take a public
transportation instead.
Common Elasticity of Demand examples
 5. Furniture and home décor – when people intend to
buy furniture, they tend to tally the prices and quality
with other showcases. Their objective is to get a
quality products at a good deal.
 6. OTT platforms - viewers are susceptible to
switching to another OTT platform if there is price rise..
Aside from the price, availability of the shows also
matters to the consumers

 In summary, the price elasticity of demand

demonstrate how price changes can influence
consumer behavior and why it is essential for
companies to understand the price elasticity of their
products or services to make informed pricing
decisions.