THE CONCEPT OF

ELASTICITY
WHAT IS ELASTICITY?
FROM MW DICTIONARY:
• THE QUALITY/STATE OF BEING ELASTIC

• THE QUALITY OF BEING ADAPTABLE

• THE RESPONSIVENESS OF A DEPENDENT ECONOMIC

VARIABLE TO CHANGES IN INFLUENCING FACTORS

IN PHYSICS SUBJECT:
• ELASTICITY REFERS TO THE EXPANSION OR
CONTRACTION OF A PHYSICAL MATTER SUCH AS A
RUBBER BAND
WHAT IS ELASTICITY?
IN ECONOMICS,
elasticity is the measurement of how
responsive an economic variable is to a
change in another. It gives answers to
questions such as:
 "If I lower the price of a product, how much
more will sell?"
 "If I raise the price of one good, how will that
affect sales of this other good?"
 "If the market price of a product goes down,
how much will that affect the amount that firms
will be willing to supply to the market?"
YOU PURCHASE MORE
WHEN PRICE BECOMES LESS

YOU PURCHASE LESS

WHEN PRICE BECOMES MORE
ELASTICITY OF DEMAND
IT TELLS US THAT WE WILL BUY/AVAIL MORE OF A GOOD
OR SERVICE IF THE PRICE DECLINES AND WE WILL BUY
LESS WHEN THE PRICE GOES UP.

HOW MUCH MORE/LESS OF A GOOD OR SERVICE WILL

YOU BUY/AVAIL GIVEN THE CHANGE IN PRICE?

THE AMOUNT VARIES FROM PRODUCT TO PRODUCT

AND OVER DIFFERENT PRICE RANGES FOR THE SAME
PRODUCT.
 ELASTICITY OF DEMAND
IN ECONOMICS…
- RESPONSIVENESS OR SENSITIVITY TO
CHANGES ON CERTAIN FACTORS.

IT IS DEFINED AS THE RATIO OF THE PERCENT CHANGE IN

ONE VARIABLE TO THE PERCENT CHANGE IN ANOTHER
VARIABLE. IT IS A TOOL USED BY ECONOMISTS TO
MEASURE THE REACTION OF A FUNCTION TO CHANGES IN
PARAMETERS IN A RELATIVE WAY.
 ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND
-THE RESPONSIVENESS OF CONSUMERS’ DEMAND TO
CHANGE IN PRICE OF THE GOOD SOLD.

INCOME ELASTICITY OF DEMAND

-THE RESPONSIVENESS OF CONSUMERS’ DEMAND TO
CHANGE IN THEIR INCOME.

CROSS PRICE ELASTICITY OF DEMAND

-THE RESPONSIVENESS OF DEMAND FOR A CERTAIN GOOD, IN
RELATION TO CHANGES IN PRICE OF OTHER RELATED GOODS.
PRICE ELASTICITY OF DEMAND

Sensitivity of quantities bought by a

consumer to a change in the product price.

Equation:

  𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

𝑬𝒅 =
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
 
PRICE ELASTICITY OF DEMAND
ARC ELASTICITY

FORMULA:  
÷

Percentage change in the

quantity demanded Percentage change in the
price
WHERE:
= COEFFICIENT OF ARC PRICE ELASTICITY (ELASTICITY COEFFICIENT )
= ORIGINAL QUANTITY DEMANDED
= NEW QUANTITY DEMANDED
= ORIGINAL PRICE
= NEW PRICE
PRICE ELASTICITY OF DEMAND
CONCEPT OF ELASTICITY

Example:
P Q
GOOD A
6 0
4 10
2 20
0 30

 
FORMULA: ÷
PRICE
 
ELASTICITY OF DEMAND
Solving for ELASTICITY COEFFICIENT P Q
6 0
GOOD A
Example: 4 10
  2 20
÷
FORMULA: 0 30

÷
÷

-5
 
PRICE ELASTICITY OF DEMAND
P Q
Solving for ELASTICITY COEFFICIENT
6 0

Example: GOOD A 4 10
  2 20
÷
FORMULA: 0 30

÷
÷

-1
 
PRICE ELASTICITY OF DEMAND
P Q
Solving for ELASTICITY COEFFICIENT
6 0

Example: GOOD A 4 10
  2 20
÷
FORMULA: 0 30
÷
÷  
Ans. -5, -1, -
-
• Negative
• It changes

As the P and Q changes,

The elasticity coefficient also changes
PRICE ELASTICITY OF DEMAND
INTERPRETATION OF THE ELASTICITY OF DEMAND

For economists, solving the elasticity coefficient is

only a tool rather an end in itself. What important to
them is to understand the meaning of the computed
elasticity coefficient. Our concern now is how to
analyze and interpret the elasticity coefficient.
Actually, there are only certain rules to remember in
analyzing and interpreting the elasticity coefficient as
you will note in the following discussion.
PRICE ELASTICITY OF DEMAND
INTERPRETATION OF THE ELASTICITY OF DEMAND

Demand for a product is said to be inelastic if

consumers will pay almost any price for the product,
while demand for a product may be elastic if
consumers will only pay a certain price, or a narrow
range of prices, for the product. Inelastic demand
means that a producer or seller can raise prices
without much hurting demand for its product, and
elastic demand means that consumers are sensitive
to the price at which a product is sold and will only
buy it if the price raises by what they consider too
much.
 
PRICE ELASTICITY OF DEMAND

the demand is inelastic if the computed

elasticity coefficient is less than 1.

the demand is elastic if the computed elasticity

coefficient is more than 1.
PRICE ELASTICITY OF DEMAND
Factors Affecting Demand Elasticity

• The availability of substitutes

- this is probably the most important factor influencing
the elasticity of a good or service. In general, the more
substitutes, the more elastic the demand will be

• Amount of income available to spend on the good

- this factor affecting demand elasticity refers to the
total a person can spend on a particular good or service
PRICE ELASTICITY OF DEMAND
Graphical Illustration
PRICE ELASTICITY OF DEMAND
Graphical Illustration
PRICE ELASTICITY OF DEMAND
Graphical Illustration
ELASTIC SUPPLY CURVE
Graphical Illustration
INELASTIC SUPPLY CURVE
Graphical Illustration
TWO EXTREME TYPES OF SUPPLY
ELASTICITY
Graphical Illustration
INCOME ELASTICITY OF DEMAND

Measures the degree to which consumers

respond to a change in their incomes by
purchasing more or less of a particular good.

Equation:
  𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝑬𝒕 =
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆
CROSS PRICE ELASTICITY OF DEMAND

Measures the responsiveness of demand to

changes in the prices of other goods, indicating
how much more/less of a particular product is
purchased as other prices change.

Equation:

  𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

𝑬𝒕 =
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆
THANK YOU !