Elasticity of
Demand &
Supply
Types of Elasticity
Elasticity Demand :
1)Price elasticity of demand (Ep)
2)Income elasticity of demand (EY)
3)Cross elasticity of demand (Ex)
Elasticity Supply:
1)Price elasticity of supply
Price Elasticity of Demand (Ep)
• Definition
- to measures the responsiveness of changes in the
quantity demanded due to the change in its price.
- means, Ep is to measure how much does demand
will change when price changed.
• Formula:
Ep = - (% ∆ in Qd for product X)
% ∆ in P of product X
= - (Q1 – Q0) x P0
Q0 (P1 – P0)
• Example:
Price(RM) Quantity Demanded
30.00 65
60.00 55
• Calculate the price elasticity of demand when price increases from RM 30.00 to
RM 60.00.
• Formula:
Ep = - (% ∆ in Qd for product X)
% ∆ in P of product X
= - (Q1 – Q0) x P0
Q0 (P1 – P0)
DEGREE OF ELASTICITY
2) Inelastic Demand p < 1
1)Elastic Demand p > 1
A large percentage of change in the price of
A small percentage of change in a good will only affect a small percentage of
the price of a good will lead to change in the quantity demanded.
larger percentage of change in
quantity demanded.
3)Unitary Elastic Demand p = 1
A condition in which percentage changes in
price equals to percentage changes in
quantity demanded.
4)Perfectly Inelastic Demand p =0
A condition in which the quantity demanded
does not change as the price changes.
5)Perfectly Elastic Demand p =
A condition in which a small percentage of change
in price leads to an infinite percentage of change
in the quantity demanded.
i)Elastic demand (Ep>1)
1) Definition:
P •A small percentage of change
in the price of a good will lead
to larger percentage of change
D
Flatter slope of in quantity demanded.
demand curve
•(% change in Qd > % change
P1 in Price
5%
P0
2) coefficient: Ep>1
15%
Q1 Q0 Q
3) Example of goods : many
substitutes goods, cloth, shoes,
detergent etc.
(ii) Inelastic demand (Ep<1)
•1) Definition:
Price (RM) •A large percentage of change in
the price of a good will lead to
small percentage of change in
quantity demanded.
P1
Steeper slope of
•(% change in Qd < % change
15%
P0 demand curve in Price
5% D
•2) coefficient: Ep<1
Q1 Q0 Quantity
(units)
•3) Example of goods : less
substitutes goods, sugar, rice,
petrol etc.
iii) Unitary elastic demand (Ep=1)
1) Definition:
P •A percentage of change in the
price of a good equal to the
percentage of change in quantity
demanded.
Hyperbola slope of
demand curve •(% change in Qd = % change in
P1
Price
P0
2) coefficient: Ep=1
Q1 Q0 Q
3) Example of goods : no example
in reality.
(iv) Perfectly Inelastic demand (Ep=0)
Price (RM) •1) Definition:
D
•A condition in which the
quantity demanded does not
change as the price changes.
P1 vertical line
15% demand curve
P0
•2) coefficient: Ep=0
Q0 Quantity •3) Example of goods : insulin,
(units) medicine.
(v) Perfectly elastic demand (Ep = ∞ )
Price (RM) •1) Definition:
•A condition in which a small
percentage of change in price
horizontal line leads to an infinite percentage of
demand curve change in the quantity
P0 D demanded.
•2) coefficient: Ep= ∞
Q0 Q1 Quantity •3) Example of goods : no
(units) example in reality.
Determinants of Price Elasticity of
Demand
• Availability of substitutes
many substitutes more elastic dd
less/no substitutes less elactic/ inelastic dd
Eg: petrol and detergents (liquid, soap)
• Proportion of the expenditure on a product
greater the income spent more elastic dd
Eg: dd for house is more elastic compared to demand for
detergents because money spent on houses is greater than money
spent on detergents.
• Time dimensions
In short run less elastic/ inelastic dd because not enough time to find another
sunstitutes.
In the long run demand more elastic because consumers can make adjustment and
find other substitutes.
• Nature of goods – necessity or luxury
Necessity good / important goods inelastic dd
eg: rice (great increase in price will not reduce the demand for rice very much).
Luxury goods/ less important goods elastic dd
• Complementary goods
goods with complementary inelastic
• Frequently purchased products
frequently purchased inelastic compared to goods that rarely
purchased. Eg: food & etc
• Income level
higher income people inelastic dd.
lower income group elastic dd (sensitive to price changes)
• Habits
habits inelastic dd.
Eg: demand for cigarette by smokers.
Relationship between price elasticity of demand and
total revenue (TR)
• The information on price elasticity of demand will be useful for the seller
to adjust their selling price since it will affect the total revenue.
• Important for producers to decide whether they should increase, decrease
or maintain the price of the good they sold in the market to enable them
to maximize their profit
• TR = price x quantity TR = P x Q
• TR increases or decreases when there is price changes depend on the
price elasticity of demand.
- If demand is elastic, to increase TR, price should be
decreased.
- If demand is inelastic, to increase TR, price should be
increased.
- If demand is unitary elastic, change in price would not
affect and change in TR.
(i) Inelastic demand (Ep<1)
Price (RM)
Assume price increases from
RM10 to RM15
15
Steep line
10 demand curve TR before = RM10 x 10 = RM100
TR after = RM15 x 8 = RM120
(TR increases)
8 10 Quantity
(units)
If demand is inelastic, an increase in price
will lead to an increase total revenue &
vice versa
ii) Elastic demand (Ep>1)
P Assume that price increases
from Rm11 to RM10
Smooth line demand
11 curve TR before = RM11 x 10 =
RM110
10
TR after = RM10 x 15 =
RM150
7 10 Q (TR increases)
If demand is elastic, an increase in price will lead
to a decrease in total revenue. So, producer need
to decrease the price to attract more customer.
iii) Unitary elastic demand (Ep=1)
P
Assume that price increases
from RM10 to RM20
Hyperbola line dd
20 curve
TR before = RM10 x 20 = RM200
10
TR after = RM20 x 10 = RM200
(TR remains the same)
10 20 Q
If demand is unitary elastic, an increase in price
will make total revenue remains the same
The R/ship between TR & Price Elasticity of
Demand when Price Increases
Elasticity Price Elasticity Price Quantity Total
Coefficient of Demand Demanded Revenue
Ep>1 Elastic Increases Decreases Decreases
more than
proportionate
Ep=1 Unitary elastic Increases Decreases in Remain the
exact same
proportion
Ep<1 Inelastic Increases Decreases Increases
less than
proportionate
The R/ship between TR & Price Elasticity of
Demand when Price Decreases
Elasticity Price Elasticity Price Quantity Total
Coefficient of Demand Demanded Revenue
Ep>1 Elastic Decreases Increases Increases
more than
proportionate
Ep=1 Unitary elastic Decreases Increases in Remain the
exact same
proportion
Ep<1 Inelastic Decreases Increases Decreases
less than
proportionate
Income Elasticity of Demand (EY)
• Definition
- to measures the responsiveness of changes in the
quantity demanded due to the change in income.
- means, Ey is to measure how much does demand will
change when income changed.
• Formula:
EY = % ∆ in Q
% ∆ in Y
= (Q1 – Q0) x Y0
Q0 (Y1 – Y0)
Three possibilities:
i. If positive: EY >1 - luxury goods (antique furniture,
sport cars and jewellery)
EY < 1 - normal goods (eg: cloth)
ii. If EY is negative = inferior goods (eg: salted fish,
(EY < 0) used cars, low grade
potatoes, broken rice)
iii. If EY is zero = necessity goods (rice, salt, etc)
(EY = 0)
• Example:
Income Qty A Qty B Qty C
100 10 20 20
120 15 20 18
150 17 20 14
Calculate the income elasticity of demand for goods A, B
and C when income increases from RM120 to RM150.
Cross Elasticity of Demand (Exy)
• Definition
- to measures the responsiveness of changes in
the quantity demanded for one product due to
the change in the price of another product.
Formula:
Ex = % ∆ in Qx
% ∆ in Py
= (Qx1 – Qx0) x Py0
Qx0 (Py1 – Py0)
i) Ex < 0 product X and Y are complements
(-ve)
i) Ex > 0 product X and Y are substitutes
(+ve)
i) Ex = 0 product X and Y are independent
for one another (no relationship)
• Example:
Price of Y Quantity x Quantity Y
RM10 60 15
RM18 40 25
RM25 20 30
• Calculate the cross elasticity of demand for good x when the price of y increases
from RM18 to RM25
Answer:
Formula :
= ∆ Qx x Py0
∆ Py Qx0
= (Qx1 – Qx0) x Py0
Qx0 Py1 – Py0
= 20 - 40 x 18
40 25 – 18
= -1.29
• Conclusion : Goods x and y are complement
Price Elasticity of Supply (Es)
• Definition
- to measures the responsiveness of changes in the
quantity supplied due to the change in its price.
- means, Ed is to measure how much does supply will
change when price changed.
• Formula:
Es = (% ∆ in Qs for product X)
% ∆ in P of product X
= (Q1 – Q0) x P0
Q0 (P1 – P0)
Price Quantity Supplied
10 4
20 7
Calculate the price elasticity of supply for good X if price increases from
RM10 to RM20.
Es = 7 – 4 x 10
4 20 – 10
= 0.75
(If price of good X increases by 1%, the quantity supplied of good X
will increase by 0.75%)
the coefficient of price elasticity of supply will always have a positive
sign because QS and P is positively related.
DEGREE OF ELASTICITY SUPPLY
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.
Inelastic Supply
A large percentage of change in the price of a
good will only affect a small percentage of change
of the quantity supplied.
Unitary Elastic Supply
Percentage change in price equals the percentage
change in the quantity supplied.
Perfectly Elastic Supply
An almost zero percentage of change in price
brings a very large percentage of change in the
quantity supplied.
Perfectly Inelastic Supply
A percentage of change in price has no effect on
the percentage of change in the quantity
supplied.
i)Elastic Supply (Es>1)
1) Definition:
P •A small percentage of change
in the price of a good will lead
Flatter slope of to larger percentage of change
supply curve in quantity supplied.
S
•(% change in Qs> % change in
P1 Price
5%
P0
2) coefficient: Es>1
15%
Q0 Q1 Q
(ii) Inelastic Supply (Es<1)
Price (RM)
•1) Definition:
s
•A large percentage of change in
Steep slope of the price of a good will lead to
P1 supply curve small percentage of change in
15%
quantity supplied.
P0
•(% change in Qs < % change in
5% Price
Q0 Q1 Quantity
(units)
•2) coefficient: Es<1
iii) Unitary elastic supply (Es=1)
1) Definition:
P •A percentage of change in the
Hyperbola s price of a good equal to the
line demand
percentage of change in quantity
curve
supplied.
•(% change in Qs= % change in
P1
Price
P0
2) coefficient: Es=1
Q0 Q1 Q
(iv) Perfectly Inelastic supply (Es=0)
Price (RM) •1) Definition:
s
•A condition in which the
quantity supplied does not
change as the price changes.
P1 vertical line
15% supply curve
P0
•2) coefficient: Es=0
Q0 Quantity
(units)
(v) Perfectly elastic supply (Es = ∞ )
Price (RM) •1) Definition:
•A condition in which a small
percentage of change in price
horizontal line leads to an infinite percentage of
demand curve change in the quantity
P0 s demanded.
•2) coefficient: Es= ∞
Q0 Q1 Quantity
(units)
Factors Influencing Elasticity of Supply
1. Technology improvement
Modern methods elastic ss
2. Time period
In short run inelastic ss (not possible to increase supply
immediately in response to change in price).
In long run more elastic ss (producers can fully adjust their
supply to the change in prices.
3. Nature of the good
too long to produce a product fairly inelastic ss. Eg: the supply
of agricultural product (primary products) is fairly inelastic
whereas the supply of manufactured goods (secondary products)
is fairly elastic.
4. Cost and feasibility of storage
change in ss requires small change in production costs elastic ss.
major change in costs inelastic ss.
too costly to be stored low elasticity of supply.
5. Availibility and mobility of factors of production
easily move elastic ss
6. Nature of the market
product sold in different market elastic ss
7. Perishability
easily perishable (eg: agricultural product) inelastic ss.
manufacturing products elastic
