Elasticity of Demand

and Supply
MAS 202 / MW / 12:30 – 2:00
MR. CADUCOY
 Overview

• Based on the law of demand, buyers are willing and

able to purchase more goods and services at lower
prices than at higher prices.
• However, the degree of response varies greatly.
• Such reactions of consumers can be measure by price
elasticity of demand.
 Overview

• In the case of producers or sellers, they tend to sell

more goods and services when prices are higher.
• Their reactions also vary depending on their ability to
produce at a given time.
• Producers and sellers reaction can be measured by
price elasticity of supply.
 Terms to Remember

• Elasticity – it is a measure used in response to changes

in the determinants of demand and supply.
• Price Elasticity – is a measure used in determining the
percentage change in quantity against the percentage
change in price.
 Terms to Remember

• Income Elasticity – the percentage change in quantity

compared to the percentage change in income.
• Cross Elasticity – the percentage change in quantity of
one good compared to the percentage change in the
price of related goods.
 Price Elasticity of Demand

• It refers to the degree of reaction or response of the

buyers to changes in price of goods and services.
• For example, if a product is very important to the
consumers, they will buy such product despite the big
increase in its price.
 Price Elasticity of Demand

• However, there are products in which just a slight

increase their prices, many consumers reluctantly buy
such products. They live even without it.
• To get an idea of the nature of elasticity, consider this
example:
 Price Elasticity of Demand
Demand Schedule of Commodity X
Price Quantity Demanded
4 100
5 80

• Let:
Q1 = 100 P1 = 4
Q2 = 60 P2 = 5
 Price Elasticity of Demand

• Solution
ep = 60 – 100
100 = What will be the result?
5–4
4
 Price Elasticity of Demand

• Note:
• The mathematical presentation of price elasticity of
demand has a negative sign.
• This is due to the inverse relationship of price and
quantity demanded. Therefore disregard the sign.
 Price Elasticity of Demand

• Interpretation:
• What is the meaning of elasticity measure 1.6?
• A 1.6 percentage change is interpreted as 1.6 percent
decrease in quantity sold for every 1 percent increase
in price.
 Price Elasticity of Demand

• To derive the price elasticity of demand, we use the

formula:
ep = percentage change in quantity demanded
percentage change in price
Price Elasticity of Demand

• Therefore
ep = Q2 – Q1
Q1
P2 – P1
P1
 Types of Elasticity of Demand
• Elastic – the elasticity coefficient is more than 1
• Inelastic – the elasticity coefficient is less than 1
• Unitary – the elasticity coefficient is equal to 1
• Perfectly Elastic – percentage change in quantity demanded
can change in infinitely
• Perfectly Inelastic – the elasticity coefficient is 0
 Price Elasticity of Supply

• The elasticity of supply is also the response of quantity

offered for sale for every change in price.
• Like the consumers, the suppliers also respond to price
changes.
 Price Elasticity of Supply

• To derive the price elasticity of supply, we use the

formula:
es = percentage change in quantity supplied
percentage change in price
Price Elasticity of Supply

• Therefore
es = Qs2 – Qs1
Qs1
P2 – P1
P1
 Price Elasticity of Supply
Supply Schedule of Commodity X
Price Quantity Supplied (Per Unit)
12 38
21 56

• Let:
Qs1 = 38 P1 = 12
Qs2 = 56 P2 = 21
 Price Elasticity of Supply

• Solution
es = 56 – 38
38 = What will be the result?
21 – 12
12
 Price Elasticity of Supply

• Note:
• The coefficient of price elasticity of supply is positive
unlike the price elasticity of demand.
• Because it is direct proportionality of price and
quantity supplied.
 Price Elasticity of Supply

• Interpretation:
• What is the meaning of elasticity measure 0.62?
• This means that for every 1 percent increase in the
price, quantity supplied will increase by 0.62 percent.
 Types of Elasticity of Supply
• Elastic – the elasticity coefficient is more than 1
• Inelastic – the elasticity coefficient is less than 1
• Infinity – percentage change in quantity supplied can
change in infinitely
• Fixed Supply – the elasticity coefficient is 0
Effect of Elasticities on Market Equilibrium
• Principles:
• For demand, the more elastic the new demand is, the
less will be increase in price, and the greater will be the
expansion of quantity sold.
• The less elastic the new demand is, the steeper the rise in
price and the less the increase in quantity sold.
Effect of Elasticities on Market Equilibrium
• Principles:
• For supply, the less elastic supply is, the higher the
increase in price and the smaller the quantity increase
will be, while the more elastic supply is, the less will be
the increase in price and the greater the increase in
quantity sold.
 Income Elasticity

• The coefficient of income elasticity measures a

product’s percentage change in quantity as a ratio of
the percentage change in income which caused the
change in quantity.
 Income Elasticity

• To derive the income elasticity we use the formula:

ey = percentage change in quantity

percentage change in income
Income Elasticity

• Therefore
es = Q2 – Q1
Q1
Y2 – Y1
Y1
 Income Elasticity
Income Schedule of Commodity X
Income Quantity Demanded
1000 200
2000 800

• Let:
Q1 = 200 Y1 = 1000
Q2 = 800 Y2 = 2000
 Income Elasticity

• Solution
ey = 800 – 200
200= What will be the result?
2000 - 1000
1000
 Income Elasticity

• Interpretation:
• What is the meaning of elasticity measure 3?
• This means that for every 1 percent increase in income,
quantity demanded will increase by 3 percent.
 Cross Elasticity

• The coefficient of cross elasticity of demand relates a

percentage change in quantity demanded of Good A in
response to a percentage change in the price of Good
B.
 Cross Elasticity

• To derive the cross elasticity we use the formula:

ec = percentage change in QD of Good A

percentage change in price of Good B
Cross Elasticity

• Therefore
ec = Q2A – Q1A
Q1A
P2B – P1B
P1B
 Cross Elasticity
Cross Schedule of Commodity A
QA PB
500 10
600 15

• Let:
QA1 = 500 PB1 = 10
QA2 = 600 PB2 = 15
 Cross Elasticity

• Solution
ec = 600 – 500
500= What will be the result?
15 - 10
10
 Cross Elasticity

• Interpretation:
• What is the meaning of elasticity measure 0.4?
• This means that for every 1 percent increase in the
price of Good B, there is an increase in the quantity
demanded of Good A by 0.4 percent.
 Cross Elasticity

• Goods A and B may be related in two ways: as

substitutes and as complements.
• If the coefficient of cross elasticity is positive, Goods A
and B are substitutes.
• Vice versa if negative, Goods A and B are complements.