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ELASTICITY CONCEPT
IE 323-3: PRINCIPLES OF ECONOMICS
Q Q 2 Q1
Q1 Q1
= =
P P2 P1
P1 P1
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.
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 =
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
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
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.
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 =
Supply
B
Quantity
Elastic =
Since B < A, the answer is > 1
ELASTICITY CONCEPT
Price
Supply
Quantity
Inelastic =
Since B < A, the answer is < 1