Lesson 9

While we expect demand

and supply and supply to
respond to changes in their
determinants, goods differ
in the degree of their
responsivesness.
In terms of degrees of elasticity,
demand and supply may be
described as:
1. Elastic – demand or supply may be
described as elastic when a change in
a determinant leads to a
proportionately greater change in
quantity of demand or supply.
2. Inelastic – demand and supply are
described as inelastic when a change
in a determinant results in a
proportionately lesser change in the
quantity of demand and supply.
3. Unitary elastic – demand and
supply are unitary elastic when a
change in a determinant leads to a
proportionately equal change in the
quantity of demand and supply.
The law of demand tells us that we
will buy more of a good or service if
the price declines and less when the
price goes up. But how much more or
less of a good or service will you buy
given the change in price?
In order to answer the question,
economist have developed the
concept of elasticity to explain how
consumers respond to changes in the
factors that affect demand.
In economics however, elasticity
means responsiveness or sensitivity.
We can classify demand elasticity
according to the factors that cause
the change. Thus,
 Price elasticity of demand – is the
responsiveness of consumers’
demand to change in price of the
good sold.
Income elasticity of demand – is the
responsiveness of consumers’
demand to a change in their income.
Cross price elasticity of demand – is
the responsiveness of demand for a
certain good, in relation to changes
in price of other related goods.
When we speak of the price elasticity
of demand, we are dealing with the
sensitivity of quantities bought by a
consumer to a change in the product
price, Thus the concept describes an
action that is within the producer’s
control. - (Keat and Young 2006)
We can therefore define price elasticity
of demand caused by a 1 percentage
change in price. Thus, we can derive
price elasticity of demand using the
following equation:
percentage change in quantity demanded
Ed=______________________________________
percentage change in price
You may have observed that the most
common method by economics textbooks in
the measurement of price elasticity of
demand is the arc elasticity. The formula for
this indicator is:
Q2-Q1 P2-P1
Ep = ____________ _____________
(Q1+Q2)/2 (P1 +P2)/ 2
Where
Ep = Coefficient of arc price elasticity
Q1= Originally quantity demanded
Q2 = new quantity demanded
P1 = Original Price
P2 = new Price
The numerator of this coefficient,
(Q2-Q1)/ [(Q1+Q2)/2] indicates the
percentage change in the quantity
demanded.

The denominator, P1-P2/ [(P1 +P2)/ 2]

indicates the percentage change in the price.
We already know that a fall in the price
of a good results in an increase in the
quantity demanded by consumers.
However, is the demand for good is
inelastic when the change in quantity
demanded is less than the change in
price.
Thus, we can say that the
demand is inelastic if the
computed elasticity coefficient is
less than 1 (Ep<1).
Generally, goods and services for
which there are no close substitutes
are inelastic.
Basic food items like rice, pork,
beef, fish, vegetables, medicines,
and oil products.
Goods that are vices like cigarettes
are likewise inelastic for the simple
reason that those who smoke cannot
easily refrain from smoking so that
even if the price of cigarettes has
been increasing, still smokers
consume them
We already know that a fall in the price
of a good results in an increase in the
quantity demanded by consumers.
However, is the demand for good is
inelastic when the change in quantity
demanded is less than the change in
price.
Thus, we can say that the
demand is inelastic if the
computed elasticity coefficient is
less than 1 (Ep<1).