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CHAPTER 3:

ELASTICITY CONCEPT
IE 323-3: PRINCIPLES OF ECONOMICS

ENGR. JERRIC D. ALMANZOR


Instructor
Industrial Engineering Department
ELASTICITY CONCEPT
DEMAND ELASTICITY

There are several factors affecting the


consumers in deciding how many of a
commodity 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.
ELASTICITY CONCEPT
DEMAND ELASTICITY

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.
ELASTICITY CONCEPT
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.
ELASTICITY CONCEPT
percentage change in quantity demanded % Qx
PDE = =
percentage change in the price of the commodity % Px

Q Q 2 Q1
Q1 Q1
= =
P P2 P1
P1 P1

Comparison of slope and elasticity

Q
Slope =
P

% Q
Price Elasticity =
% P
ELASTICITY CONCEPT
Example: Let P1 = 2 Q1 = 10
P2 = 3 Q2 = 4

4 10 6
Slope = = = 6
32 1

4 10 6
10 10 0.6
Price Elasticity = = = = 1.2
32 1 0.5
2 2
ELASTICITY CONCEPT
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.
For example, the commodities are Car and Pencil.
Car: a one peso (1P) increase in the price of car
will mean a decrease in the demand for cars by 6
units.
Pencil: a one peso (1P) increase in the price of
pencil will mean a decrease in the demand for
pencils by 6 units.
ELASTICITY CONCEPT
Analysis: The responsiveness of the consumer on
a peso (1P) 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.
ELASTICITY CONCEPT
For example, the commodities are Car and Pencil.
Car: a one percent increase in the price (1%) of
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 in terms of
percent change and not the units of commodities,
the comparison is understandable.
ELASTICITY CONCEPT
Values and Types of Elasticity

/E/ = 1 Unitary Elastic, that is when % Q = %P

/E/ > 1 Elastic, that is when % Q > %P

/E/ < 1 Inelastic, that is when % Q < %P

/E/ = 0 Perfectly Inelastic

/E/ = Perfectly Elastic


ELASTICITY CONCEPT
Graphical Illustration of the different types of price demand
elasticity
Price

Demand

Quantity

Perfectly Elastic =

B
Since A = 0,= =
0
ELASTICITY CONCEPT
Price Demand

Quantity

Perfectly Inelastic =

0
Since A = 0,= =0
A
ELASTICITY CONCEPT
Price

Demand
B

Quantity

Unitary =

Since B = A, the answer is 1


ELASTICITY CONCEPT
Price

A
Demand

Quantity

Elastic =

ELASTICITY CONCEPT
Price

Demand

Quantity

Inelastic =

Since B < A, the answer is 1
ELASTICITY CONCEPT
B. Income Elasticity
It measures the consumers responsiveness
or reaction to changes in his incomes. It is
obtained by getting the quotient of the percentage
change in the quantity demanded in response to a
given percentage change in the income.
ELASTICITY CONCEPT
percentage change in quantity demanded % Qx
Ie = =
percentage change in the income % I

Q Q 2 Q1
Q1 Q1
= =
I I2 I1
I1 I1
ELASTICITY CONCEPT
Example: Let I1 = 1000 Q1 = 20
I2 = 2000 Q2 = 50

50 20 30
Income 20 20 = 1.5 = 1.5
= =
Elasticity 2000 1000 1000 1
1000 1000
ELASTICITY CONCEPT
Interpretation of the income elasticity = 1.5

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 the income.

More so, the positive sign of the 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.
ELASTICITY CONCEPT
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.
ELASTICITY CONCEPT
percentage change in quantity demanded for product X % Q x
=
percentage change in the price of related commodities (Py % Py

Q Q 2 Q1
Q1 Q1
CPe = =
Py PY2 PY1
Py1 PY1
ELASTICITY CONCEPT
Example: Let Py1 = 300 Q1 = 10
Py2 = 200 Q2 = 50

50 10 40
10 10 4
CPe = = = = 12
200 300 100 0.33
300 300
ELASTICITY CONCEPT
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 commodity.
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.
ELASTICITY CONCEPT
Supply Elasticity

Supply 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 or 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.
ELASTICITY CONCEPT
percentage change in quantity supplied % Qx
Pse = =
percentage change in the price of commodity % Px

Q Q 2 Q1
Q1 Q1
PSe = =
P P2 P1
P1 P1
ELASTICITY CONCEPT
Example: Let P1 = 5 Q1 = 10
P2 = 10 Q2 = 40

40 10 30
Supply Price Elasticity = 10 = 10 = 3 = 3
10 5 5 1
5 5
ELASTICITY CONCEPT
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.
ELASTICITY CONCEPT
Values and Types of Elasticity

/E/ = 1 Unitary Elastic, that is when % Q = %P

/E/ > 1 Elastic, that is when % Q > %P

/E/ < 1 Inelastic, that is when % Q < %P

/E/ = 0 Perfectly Inelastic

/E/ = Perfectly Elastic


ELASTICITY CONCEPT
Graphical Illustration of the different types of price supply
elasticity
Price

Supply

Quantity

Perfectly Elastic =

B
Since A = 0,= =
0
ELASTICITY CONCEPT
Price Supply

Quantity

Perfectly Inelastic =

0
Since B = =0
A
ELASTICITY CONCEPT
Price

Supply

Quantity

Unitary =

Since B = A, the answer is 1


ELASTICITY CONCEPT
Price

Supply

B
Quantity

Elastic =

Since B < A, the answer is > 1
ELASTICITY CONCEPT
Price
Supply

Quantity

Inelastic =

Since B < A, the answer is < 1

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