THE PRICE ELASTICITY

CONCEPT
Group 2
Mayor, Zophia Elayne
Cloma, Anna Lorraine
Gallardo, Anna Clarizza
Luza, El Mae Joy
Pangan, Kimberly Rose
LEARNING OUTCOMES
• Understand the concept of elasticity of demand and
supply;
• Differentiate arc and point elasticity;
• Compute elasticity values of demand and supply with
given changes in price and quantity;
• Distinguish the different degrees of elasticity of demand
and supply;
• Apply the concept of elasticity to various economic
situation; and
• Recognize the value of elasticity in relation to a seller’s
revenue.
 TOPICS

 Price Elasticity of Demand

 Income Elasticity of Demand
 Cross Elasticity of Demand
 Price Elasticity of Supply
 Projecting the Future
 ELASTICITY

• It is the degree of responsiveness of one variable due to

the changes of another variable.

• It also refer to the degree to which individuals, consumers

or producers change their demand or the amount supplied
in response to price or income changes. It is predominantly
used to assess the change in consumer demand as a result
of a change in a good or service's price.
 IMPORTANCE OF ELASTICITY CONCEPTS

• For a Businessman: If a businessman finds that the

demand is inelastic, he is free to increase prices. In case if
the demand is elastic, by slightly reducing the price, the
demand will increase sharply and hence the total revenue
will also increase.

• The better a company can assess future demand, the

better it can plan its resources in which the company
exposed to factors that influencing the flow of demand.
The basic formula used to determine elasticity is:

Where, EP= Price elasticity of demand

• q= Original quantity demanded
• ∆q = Change in quantity demanded
• p= Original price
• ∆p = Change in price
 ARC ELASTICITY
• The elasticity of one variable with respect to another
between two given points. It is used when there is no
general function to define the relationship of the two
variables. Arc elasticity is also defined as the elasticity
between two points on a curve.
Formula:
 POINT ELASTICITY

• Takes the elasticity of demand at a particular point on a

curve.
Formula:
 PRICE ELASTICITY OF DEMAND
• It refers to the degree of responsiveness of quantity
demanded due to the changes of the price of the product
itself.
Formula:

Ed= % changes in quantity demanded =

%changes in price

Q1,P1=Current
Q2,P2=Previous
 Degree of Price Elasticity of Demand

 RELATIVELY ELASTIC DEMAND

 The consumers are responsive to the changes in
price. This means that a small change in price results
to a great change in quantity demanded.
 Its price elasticity is greater than one (ED = >1)

Examples:
luxury goods
curve = slightly
horizontal
 RELATIVELY INELASTIC DEMAND
 The consumers are unresponsive to the changes in
price. This means that a percentage change in
quantity demanded is less than the percentage
change in price.
 Its price elasticity is less than one (ED = <1)

Examples:
basic necessities
curve =
slightly
vertical
 UNITARY ELASTIC DEMAND
 a change in price is equal to a change in quantity
demanded.
 demand is unitary elastic when elasticity coefficient
is equal to one (ED = 1)
curve = right
triangle
 PERFECTLY ELASTIC DEMAND
 when the quantity demanded changes even without
changes in price.

 the consumers are very responsive.

 Its price elasticity coefficient is infinite (ED = ∞)

Example: super wants
curve = horizontal
 PERFECTLY INELASTIC DEMAND
 demand is perfectly inelastic when quantity
demanded totally does not respond to any
changes in price.
 Its price elasticity coefficient is zero (ED = 0)

Examples: maintenance
curve= vertical
Relatively Relatively Unit Elastic Perfectly Perfectly
Elastic Inelastic goods Elastic Inelastic
goods goods goods goods

PED = >1 PED = <1 PED = 1 PED = ∞ PED = 0

 Determinants of Price Elasticity of Demand
1. The importance or degree of necessity of the goods
(a) luxury goods – elastic (b) necessities - inelastic
2. Number of available substitutes
(a) goods with greater substitutes – elastic
(b) goods with less or no substitutes – inelastic
3. The proportion of income in price changes
(a) change in price has no effect on the consumer income
or budget – inelastic; (b) change in price resulting to a
substantial effect on consumers’ income – elastic demand
4. The time period – the longer the time is, the more elastic or
less inelastic the demand will be.
 2 TYPES OF EFFECTS ON TOTAL REVENUE
1. Price Effect
 refers to an increase in price in inelastic products
that will result to a positive effect on revenue and
vice versa.
2. Quantity Effect
 refers to an increase in price in elastic products that
will lead to less quantity sold.
Income Elasticity of Demand
 INCOME ELASTICITY OF DEMAND

• Sensitivity of quantity demanded for a certain goods to a

change in income of consumers who buy the goods or
services.
Example:
income rise
Argentina Meatloaf – P30 Spam - P100

 Quantity demanded of Spam goes up

 Quantity demanded of Argentina Meatloaf
falls down
 What would happen to demand of a certain product if your
income increased 50%?

- Spend more?
- Spend Less?
- Switch product?
Types of Goods

• Normal Goods (Necessity goods, Luxury goods)

• Inferior Goods
Formula for Income Elasticity of Demand:
Inferior Normal Luxury Neutral
Goods Goods Goods Goods

IEd < 0 IEd > 0 < 1 IEd > 1 IEd = 0

 EXAMPLE 1
Income increased 40%
Demand increased 12.5%
IEd = % change in quantity demanded
% change in Income
= 12.5%
40%
= 0.3125
0.3125 > 0=Normal Goods
 EXAMPLE 2

Income decreased -20%

Quantity Demanded increased 50%

IEd = % change in quantity demanded

% change in Income
= 50%
-20%
= -2.5
-2.5 < 0=Inferior Goods
 EXAMPLE 3
Increase Income 20%
Quantity Demanded Increased 100%

IEd = % change in quantity demanded

% change in Income
= 100%
20%
=5
5>1
Luxury Goods
 EXAMPLE 4
Income Increase 25%
Quantity Demanded = 0

IEd = % change in quantity demanded

% change in Income
= 0%
25%
= 0 - Neutral Goods
 Price Elasticity of Supply

• It is defined as the responsiveness of quantity supplied

when the price of the good changes.

• The Price Elasticity of Supply is always positive

because of the Law of Supply says that the quantity
supplied increases with an increase in price.
Price Elasticity of Supply Formula :
%∆in Qs
Price Elasticity of Supply (PES) =
%∆in P
(PES = Percentage Change in Quantity Supply
Percentage Change in Price )
OR
 TYPES OF PRICE ELASTICITY OF SUPPLY

Relatively Elastic Supply (PES > 1)

The Quantity Supplied changes by a larger
percentage than the percentage change in price.

Curve – Flat but not horizontal

 Relatively Inelastic Supply (PES < 1)
Quantitative Supplied changes by a lower percentage
than a percentage change in price.

Curve – Upward Slope

 Unit Elastic Supply (PES = 1)
Quantity Supplied changes by the same percentage as
the change in price.

Curve – Straight line

passing through the
origin
 Perfectly Elastic Supply (PES = ∞)
Suppliers will be willing and able to supply any amount
at a given price but none at a different price.

Curved - Horizontal
 Perfectly Inelastic Supply (PES = 0)
The Quantity Supplied doesn’t change as the price
changes.

Curve - Vertical
Relatively Relatively Unit Elastic Perfectly Perfectly
Elastic Inelastic Elastic Inelastic

PES = >1 PES = <1 PES = 1 PES = ∞ PES = 0

 FACTORS AFFECTING PRICE ELASTICITY OF
SUPPLY

1. Spare Production Capacity

 If there is plenty of spare capacity then a business
can increase output without a rise in costs and supply
will be elastic in response to a change in demand.
2. Stocks of Finished Products and Components
 If stocks of raw materials and finished products are at
a high level then a firm is able to respond to a change
in demand – supply will be elastic.
3. Factor Mobility
 If capital and labor are occupationally mobile then the
elasticity of supply for a product is likely to be higher as
resources can be mobilized to supply the extra output.

4. Time Period and Production Speed

 Supply is more price elastic the longer the time that a firm
is allowed to adjust its production levels.
Projecting The Future
• The Concept of elasticity has several applications both in business and
economic decision making.
• It can determine the effect of price change on the on revenue.
 Demand Schedule of Rice
Price (P) Quantity Total Revenue
Demanded (Qd) (P x Qd)
500 11 5,500
400 12 4,800
300 13 3,900
200 14 2,800
100 15 1,500
 Demand Curve of Rice
600

500

400

300

200

100

0
11.0 12.0 13.0 14.0 15.0

Considering the coefficient is less than 1. Notice that the price rapidly decrease from 400
to 200 which is less proportionate to an increase in quantity demand from 12 to 14.
 Demand Schedule of Ball Pen
Price (P) Quantity Demanded (Qd) Total revenue (P x Qd)
12 4 48
11 8 88
10 12 120
9 16 144
8 20 160
7 24 168
Demand Curve of Ball Pen
12

10
(P = 11; Qd = 8)
8

0
0 5 10 15 20 25 30

Notice that the decrease in price from 11 to 8 results to a greater proportionate

increase in quantity demanded from 8 to 20.
Demand Schedule of Revenue
Price (P) Quantity Demanded (Qd) Total revenue (P x Qd)
5 36 180
4 45 180
3 60 180
2 90 180
1 180 180
Demand Curve of Jewelry
6

0
0 20 40 60 80 100 120 140 160 180 200

In this case, any change in price is proportionate to a change in quantity

demanded such as in a way that the total revenue remains constant at 180.
 Demand Schedule of Calculators

Price (P) Quantity Demanded (Qd)

5 20
10 25
15 30
20 35
25 40

We can also determine the Price elasticity of Supply.

Demand Curve of Calculators
40

35

30

25

20

15

10

0
0 5 10 15 20 25 30 35 40 45

The result depict a 4% change in quantity supplied for every 1%

change in the Product.
THANK YOU!!!