ELASTICITY OF DEMAND AND

SUPPLY
Prepared by: Charles Darell C. Reyes, LPT
ELASTICITY
- degree of their response to a change.
- a measure of how much buyers and
sellers respond to changes in market
condition.
IN TERMS OF HOW RESPONSIVE
DEMAND AND SUPPLY ARE,
DEGREES OF ELASTICITY MAY
EITHER BE:
1. Elastic – A change in a determinant will lead
to a proportionately greater change in demand
and supply. The absolute value of the
coefficient of elasticity is greater than 1.
Example: If the price of LPG increases by
10% and as a result the quantity demanded
goes down by 12%, then we say that the
demand for LPG is elastic.
ELASTIC
PRICE < QUANTITY DEMANDED
- Elasticity is greater than 1
IN TERMS OF HOW RESPONSIVE
DEMAND AND SUPPLY ARE,
DEGREES OF ELASTICITY MAY
EITHER BE:
2. Inelastic – A change in a determinant will
lead to a proportionately lesser change in
demand and supply. The absolute value of the
coefficient of elasticity is less than 1.
Example: Suppose the price of cellphone load
goes up by 5% and the quantity goes by 3%,
then we say that demand for cellphone load is
inelastic.
INELASTIC
PRICE > QUANTITY DEMANDED
- Elasticity is lesser than 1
IN TERMS OF HOW RESPONSIVE
DEMAND AND SUPPLY ARE,
DEGREES OF ELASTICITY MAY
EITHER BE:
Unitary Elastic – A change in a determinant will
lead to a proportionately equal change in demand
and supply. The absolute value of the coefficient
of elasticity is equal to 1.
Example: Let us say that the price of string beans
goes down by 6% and as a result the quantity
demanded goes up by 6% also, we describe the
demand for string beans as a unitary elastic.
UNITARY ELASTIC
PRICE = QUANTITY DEMANDED
- Elasticity is equal 1
 PRICE ELASTICITY OF
DEMAND
This measures the responsiveness of demand in
a change in the price of the good. The value of
price elasticity may be measured in two ways:
1. ARC ELASTICITY – the value is computed
by choosing two points on the demand curve and
comparing the percentage changes in the
quantity and the price on those two points.
 FORMULA
Ep = {(Q2 – Q1)/(Q2 + Q1)/2)} ÷ {(P2 –
P1)/(P2 + P1)/2)}
Q2 = new quantity demanded
Q1 = original quantity demanded
P2 = new price of the good
P1 = original price of the good
LET’S PRACTICE!
1. The price of a certain alcohol goes up
from 60 to 70 and quantity demanded
goes down from 3000 to 2,800. Find the
elasticity of the alcohol.
LET’S PRACTICE!
1. The price of a certain alcohol goes
down from 60 to 70 and quantity
demanded goes up from 3000 to 2,800.
Find the elasticity of the alcohol.
Ep = {(Q2 – Q1)/(Q2 + Q1)/2)} ÷ {(P2 –
P1)/(P2 + P1)/2)}
2. The quantity demanded of N95 mask
goes up from 500 to 600 and the price
goes down from 100 to 80. What is the
degree of elasticity of N95 mask?
2. The quantity demanded of N95 mask
goes up from 500 to 600 and the price
goes down from 100 to 80. What is the
degree of elasticity of N95 mask?
Ep = {(Q2 – Q1)/(Q2 + Q1)/2)} ÷ {(P2 –
P1)/(P2 + P1)/2)}
3. The equation for a demand curve is P
= 48 – 3Q. What is the elasticity in
moving from a quantity of 5 to a quantity
of 6?
3. The equation for a demand curve is P
= 48 – 3Q. What is the elasticity in
moving from a quantity of 5 to a quantity
of 6?
Ep = {(Q2 – Q1)/(Q2 + Q1)/2)} ÷ {(P2 –
P1)/(P2 + P1)/2)}
4. The equation for a demand curve is P
= 2/Q. What is the elasticity of demand as
price falls from 5 to 4? What is the
elasticity of demand as price falls from 9
to 8? Would you expect these answers to
be the same?
4. The equation for a demand curve is P =
2/Q. What is the elasticity of demand as
price falls from 5 to 4? What is the elasticity
of demand as price falls from 9 to 8? Would
you expect these answers to be the same?
Ep = {(Q2 – Q1)/(Q2 + Q1)/2)} ÷ {(P2 –
P1)/(P2 + P1)/2)}