Elasticity

is a measured responsiveness of one variable to another. As

used in economics, elasticity is a general concept that describes the
proportional change in quantity relative to a proportional change in
the price of the goods, or the proportional change in a shift factor
such as income or price of another price.
Elasticity of Demand
refers to the reaction or response of the buyers to
changes in price of goods and services.
1. Elastic demand
A change in price results to a greater change in quantity
demanded. Buyers are very sensitive to a price change, they are
easily discourage to buy the product if there prices increase,
they are also easily encourage to buy the same products if there
prices decrease.
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2. nelastic demand
A change in price results to a lesser change in quantity
demand. This means the buyers are not sensitive to a price
change.
3. Unitary demand
A change in price results to an equal change in quantity
demand.
4. Perfectly elastic demand
Without change in price, there is an infinite change in
quantity demand. Such demand applies to a company which sells
in a purely competitive market.
5. Perfectly inelastic demand
A change in price creates no change in quantity demand.
This is an extreme situation which involves life or death to an
individual. Regardless of price, the buyer has to buy the product
like a medicine with no substitute.
1. Number of good substitutes
Demand is elastic for product with many good
substitutes. An increase in the price of such product
induces buyers to look for good substitute.
2. Price increase in proportion to income
If the price increase has very little effect on the
income or budget of the buyers, demand inelastic.
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3. mportance of the product to the consumers

Demand is elastic for a product which is not very

important to the buyers or consumers. Demand is inelastic
for a product that is important to all consumers.
Elasticity Formula
Economic Significance of Demand Elasticity
A good knowledge of demand elasticity helps the
businessmen in planning their pricing strategies. Clearly
the market price of a product influences wages, rents,
interest, and profits. With the right pricing strategy,
businessmen may attain the followings:
1. Achieve target return on the investments.
2. Maintain or improve a share in the market.
3. Meet or prevent competition.
4. Maximize profits.
Some practical examples of economic significance of
elasticity of demand.

1. Wage determination
2. Farm production guide.
3. Maximize profits.
4. Imposition of sales taxes.
Elasticity of Supply
refers to the reaction or response of the
sellers/producers to price change of goods.
1. Elastic supply
A change in price results to a greater change in
quantity supplied. This means producers are very
responsive to price change.
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2. nelastic s
upply

A change in price results to a lesser change in

quantity supplied. This shows that producers have
very weak response to price change.
3. Unitary supply
A change in price results to an equal change in
quantity supplied.
4. Perfectly elastic supply
Without change in price, there is an infinite (without
limit) change in quantity supplied.
5. Perfectly inelastic supply
A change in price has no effect on quantity supplied.
These are products which cannot be increased immediately
or in a short-run period for lack of machinery, raw
materials, or money.
D eterminants of Supply Elasticity

The principal determinant of supply elasticity is the time

involved in the ability of producers to respond to price changes. If it
takes a short time to produce the products to take advantage of an
increase in price, then supply is elastic. On the other hand, if it
takes a long time to produce the products, the supply is inelastic