WHAT IS ELASTICITY?

Changes in price (or other factors) may or may not affect

the demand or supply of any good or service. Decision-
making for either buyer or seller will be more meaningful
if there is a way to know the extent to which demand and
supply are affected by changes in some determinants. The
effect is attributed to elasticity.
A definition of elasticity is provided as follows:
 It is the measure of the sensitivity or responsiveness of
quantity demanded or quantity supplied to changes in prices
(or other factors).
 The definition indicates that elasticity concerns both supply
and demand.
ELASTICITY OF DEMAND
Demand elasticity “indicates the extent to which
changes in price (or other factors) cause changes in
the quantity demanded.”
Demand elasticity may be classified as follows:
1. Price elasticity of demand
2. Income elasticity of demand, and
3. Cross elasticity of demand.
PRICE ELASTICITY OF DEMAND
Price elasticity is used to determine the responsiveness of
demand to changes in the price of the commodity. It may
be calculated with the use of the formula below:
Ep = percentage change in quantity demanded
percentage change in price
= QD2–QD1/QD1
P2-P1/P1
where Ep = price elasticity of demand
QD2 = new quantity demanded
QD1 = original quantity demanded
P2 = the new price
P1 = the original price.
SAMPLE PROBLEM:
What is the demand elasticity given the following:
1. Original quantity demanded = 10,000 kg
2. Original price = P5.00 per kilo
3. New quantity demanded = 16,000 kg
4. New price = P4.00 per kilo.

Answer: 16,000 – 10,000/10,000 = 3

4.00 – 5.00/5.00
PRICE ELASTICITY OF DEMAND CLASSIFIED
As to price elasticity, demand may be classified into
the following types:
1. Elastic demand – is that type of demand where the
quantity that will be bought is affected greatly by
changes in the price. The change must be greater than
elasticity coefficient of 1.
The demand for common luxuries (like most
household appliances) and goods capable of many
uses (like paper) is elastic.
2. Inelastic demand – this refers to the demand where
a percentage change in price creates a lesser change
in quantity demanded. An example is when a 20%
reduction in price caused only a 10% increase in
demand. The elasticity coefficient in this type is less
than 1.
The demand for necessities like food, clothing, and
shelter is inelastic. Consumers will continue to buy
necessities in quantities previously purchased
regardless of changes in prices of such goods.
3. Unitary demand – in this type of demand, a change
in price creates an equal change in quantity
demanded. An example is when a 20% price
reduction resulted to a 20% increase in demand.
Elasticity under the unitary demand is equal to the
coefficient of 1.
Semi-luxury items are goods considered with
unitary elasticity. Examples are designer clothes,
watches, and bath soap.
ELASTIC DEMAND
Original Quantity demanded = 10,000 kilos
Original price = P5.00 per kilo
New Quantity demanded = 16,000 kilos
New price = P4.00 per kilo

Ep = 16,000 – 10,000/10,000 = 3
4.00 – 5.00/5.00
INELASTIC DEMAND
Original Quantity demanded = 10,000 kilos
Original price = P5.00 per kilo
New Quantity demanded = 11,000 kilos
New price = P4.00 per kilo

Ep = 11,000 – 10,000/10,000 = 0.5

4.00 – 5.00/5.00
UNITARY DEMAND
Original Quantity demanded = 10,000 kilos
Original price = P5.00 per kilo
New Quantity demanded = 12,000 kilos
New price = P4.00 per kilo

Ep = 12,000 – 10,000/10,000 = 1
4.00 – 5.00/5.00
INCOME ELASTICITY OF DEMAND
 The demand for a product or service is affected not only by its price
but also by other factors like consumer income. To measure the effect
of consumer income on demand, the elasticity concept may be used.
 Income elasticity of demand refers to the determination of the
responsiveness of demand to a change in consumer income. It may be
calculated by using the formula as follows:
Ey = percentage change in quantity demanded
percentage change in income
= QD2–QD1/QD1
Y2-Y1/Y1
where Ey = income elasticity of demand
Y2 = the new income
Y1 = the original income.
 When elasticity is greater than 1, demand is said to be income elastic;
when less than 1, it is income inelastic; and when equal to 1, it is
unitary elastic.
DETERMINANTS OF DEMAND ELASTICITY
The demand elasticity of goods and services are not similar;
some are elastic, and some are inelastic. This is so because of
certain factors (or determinants). They are as follows:
1. The price of the good in relation to the consumer’s budget.
Consumers are more sensitive to price changes of goods that
take a big amount of their budget.
2. The availability of substitutes. The demand elasticity of a
good is affected by the availability of substitutes. The more
and the closer substitutes are, the more people will switch to
substitutes, when the price of the good rises.
3. The type of good. The demand elasticity of a good is affected
by its type, like whether it is a luxury or a necessity.
4. The time under consideration. The demand for a good
becomes more elastic over a longer period of time.
ELASTICITY OF SUPPLY
 Elasticity of supply refers to the responsiveness of the sellers to a
change in price. This may be determined by computing for the
percentage change in the quantity supplied of a good divided by the
percentage change in the price. The mathematical formula for
determining elasticity of supply is:
Es = percentage change in quantity supplied
percentage rise in price
= QS2–QS1/QS1
P2-P1/P1
where Es = price elasticity of supply
QS2 = new quantity supplied
QS1 = original quantity supplied
P2 = new price
P1 = original price.
CLASSIFICATIONS OF SUPPLY
ELASTICITY
Like demand elasticity, supply elasticity may also be classified
into the following:
1. Elastic supply
2. Inelastic supply
3. Unitary elastic supply.
Elastic supply is where the quantity supplied is affected greatly
by changes in the price. The change is greater than the elasticity
coefficient of 1.
When the quantity supplied is not affected greatly by changes
in the price, supply is said to be inelastic. The elasticity is less
than 1.
When the percentage change in the quantity supplied is equal
to the percentage change in price, supply is unitary elastic. The
elasticity coefficient is equal to 1.
ELASTIC SUPPLY
New quantity supplied (QS2) = 18,000 kilos
Old quantity supplied (QS1) = 10,000 kilos
New price (P2)= P6.00/kilo
Old price (P1) = P5.00/kilo

Elasticity of supply (Es) = 18,000 – 10,000/10,000 = 4

6.00 – 5.00/5.00
INELASTIC SUPPLY
New quantity supplied (QS2) = 11,000 kilos
Old quantity supplied (QS1) = 10,000 kilos
New price (P2)= P6.00/kilo
Old price (P1) = P5.00/kilo

Elasticity of supply (Es) = 11,000 – 10,000/10,000 = 0.5

6.00 – 5.00/5.00
UNITARY ELASTIC SUPPLY
New quantity supplied (QS2) = 12,000 kilos
Old quantity supplied (QS1) = 10,000 kilos
New price (P2)= P6.00/kilo
Old price (P1) = P5.00/kilo

Elasticity of supply (Es) = 12,000 – 10,000/10,000 = 1

6.00 – 5.00/5.00
DETERMINANTS OF SUPPLY
ELASTICITY
Supply is either elastic or inelastic depending on
whether or not the sellers are able to respond
effectively to changes in price. Supply elasticity will
depend on the following factors:
1. The feasibility and cost of storage.
2. The ability of producers to respond to price changes.
3. Time.