ELASTICITY CONCEPT
TOPICS COVERED:
1. TYPE OF ELASTICITY
2. TYPES OF DEMAND ELASTICITY
3. SUPPLY ELASTICITY
(FOR CLASSROOM DISCUSSION ONLY NOT FOR
CITATION AND DISTRIBUTION)
ELASTICITY DEFINED:
- defined as the ratio of the percent change in one
variable (X) to the percent in another variable. (Y)
LIKE: A change in quantity demand (X) when the price (Y)
change or a change in quantity supply (X) when the number
of sellers change (Y).
EXPRESSED AS: ε = %ΔX / %ΔY
WHERE: ε is elasticity, X and Y are variables
Δ is change
TYPES OF ELASTICITY
THERE ARE FIVE TYPES OF ELASTICITY:
1. ELASTIC – the percentage change in variable X is higher
than the percentage change in variable Y. Resulted when the
value of the ε is greater than 1.
2. INELASTIC – the percentage change in variable X is less
than the percentage change in variable Y. Resulted when the
value of the ε is less than 1.
3. UNITARY – the percentage change in variable X is
proportion or equal to the percentage change in variable Y.
Resulted when the value of the ε is equal to 1.
TYPES OF ELASTICITY
THERE ARE FIVE TYPES OF ELASTICITY:
4. PERFECT INELASTIC – there is no percentage change in
variable X while there is a percentage change in variable Y.
Resulted when the value of the ε is 0.
5. PERFECT ELASTIC – there is a percentage change in
variable X while there is no percentage change in variable Y.
Resulted when the value of the ε is ∞ .
CLASSIFICATION OF ELASTICITY
THERE ARE TWO CLASSIFICATION OF ELASTICITY:
THE DEMAND ELASTICITY AND SUPPLY ELASTICITY.
DEMAND ELASTICITY – measures the degree of
responsiveness of quantity demanded of a product to a given
change in one of the independent variables which affects demand
for that product. Demand elasticity is sub-classified into three
(3):
a. PRICE ELASTICITY OF DEMAND
b. INCOME ELASTICITY OF DEMAND
c. CROSS-PRICE ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND
- is the responsiveness of consumers’ demand to change in
price of the good sold.
Formula:
INCOME ELASTICITY OF DEMAND
- is the responsiveness of consumers demand to a change in
their income.
Formula:
NOTE TO THE RESULT OF THE
ELASTICITY COEFFICIENT IN INCOME
ELASTICITY
TYPES OF GOODS INCOME ELASTICITY
COEFFICIENT
NORMAL GOOD Ε > 0 (POSITIVE)
NORMAL; LUXURY POSITIVE AND Ε > 1
GOOD
NORMAL; NECESSITY POSITIVE AND Ε <1
GOOD
INFERIOR Ε < 0 (NEGATIVE)
CROSS-PRICE ELASTICITY OF DEMAND
- is the responsiveness of demand for a certain good in relation to
changes in price of other related good.
Formula:
NOTE TO THE RESULT OF THE ELASTICITY COEFFICIENT
OF CROSS PRICE ELASTICITY
TYPE OF GOOD ELASTICITY COEFFICIENT
SUBSTITUTE GOOD Ε > 0 (POSITIVE)
COMPLEMENT GOOD Ε < 0 (NEGATIVE)
EXAMPLES
1. Consider the following tabular presentation:
QUANTITY PRICE INCOME
DEMAND
OLD 20 KLS. P10.00 P300.00
NEW 30 5.00 400.00
Compute for the price elasticity of demand and its income
elasticity.
2. Suppose the price of Good A changes to P20.00 from P18.00.
Due to price change, the quantity demand of its related good
which is Good B also declines from 50 units to 40 units.
Compute for the cross-price elasticity of demand and
determine if what type of good and elasticity.
SUPPLY ELASTICITY
- measures the degree of responsiveness of quantity supplied of
a product to a given change in one of the independent variables
which affects supply for that product.
PRICE ELASTICITY OF SUPPLY
- refers to the reaction or response of the seller to price
changes of goods sold.
Formula:
EXAMPLE:
1. Suppose the price of Good C increases from P24.00 to P30.00
which corresponds to an increase in quantity supply from 120
units to 160 units. Compute for the supply elasticity.
