BONJOUR!

Elasticities of Demand
and Supply
We have learned how demand and supply respond to
the changes in their determinants. Goods, however,
differ in terms of how demand and supply respond to
changes in these determinants. The degree of their
response to a change is referred to as a
ELASTICITY.

Elasticity- is a measure of how much buyers and

sellers respond to changes in market conditions.
1. Elastic
a change in a determinant will lead to a proportionately greater change
in demand or supply. The absolute value of the coefficient of elasticity is greater
than 1.
2. Inelastic
a change in determinant will lead to a proportionately lesser change in
demand or supply. The absolute value of the coefficient of elasticity is lesser than
1.
3. Unitary Elastic
a change in a determinant will lead to a proportionately equal change
in demand or supply. The absolute value of the coefficient of elasticity is equal to
1.
 Elasticity of Demand
There are three types of elasticity of demand that deal with the responses to a
change in the price of the good itself, in income, and in the price of a related good
which is a substitute or a complement.
Price Elasticity of Demand
-this measures the responsiveness of demand to a change in the price of the
good. The concept of elasticity is measured in percentage changes. The value of
price elasticity may be measured in two ways:
1. Arc Elasticity- the value of elasticity 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.
2. Point Elasticity- measures the degree of elasticity on a single point on the curve.
Changes on a single point are infinitesimally small
Income Elasticity of Demand
this measures how the quantity demanded changes as a consumer
income changes. Income elasticity od demand is equal to (% change in
quantity demand)/ (% change in income).
Cross Price Elasticity of Demand
this measures how quantity demanded changes as the price of a
related good changes. It measures the responsiveness of demand for a
good to the change of the price of a substitute good or a complements
are.
Price Elasticity of Supply
determines whether the supply curve is steep or flat. A steep
curve signifies a high demand. A steep curve signifies a high
degree of elasticity or ability to change, while a flat curve
indicates an inability to change in response to a change in the
price of the good. Goods that are easy to produce have elastic
supply while those which need a long time to produce in which
are hard to make have inelastic supply.
Market Structure
Market Structure

- Refers to the competitive environment

in which buyers and sellers operate.
Competition- is rivalry among various sellers in the market.

Market- is a situation of diffused, impersonal competition among

sellers who compete to sell their goods and among buyers who
use their purchasing power to acquire the available goods in the
market.
There are varying degrees of competition in the market
depending on the following factors:
Number and size of buyers and sellers
Similarity or type of product bought and sold
Degree of mobility of resources
Entry and exit firms and input owners
Degree of knowledge of economic agents regarding
prices, costs, demand, and supply conditions.
Perfect Competition- implies an ideal situation for the buyers and sellers. The following are the
characteristics of a perfectly competitive market:
 There are so many buyers and sellers that each has a negligible impact on market price.
Change in output of a single firm will not perceptibly affect market price of the good. No
single buyer can influence the price since he/she purchases only a small amount. Buyer
cannot extract quantity discounts and credit terms.
 A homogenous product is sold by sellers, which means the products are highly similar in
such a way consumers will have no preference in buying from one seller over another. The
goods offered for sale are all exactly the same or are perfectly standardized .
 Perfect mobility of resources refers to the easy transfer of resources in terms of use or in
terms of geographical mobility.
 There is perfect knowledge of economic agents of market conditions such as present and
future prices, costs, and economic opportunities.
 Market price or quantity of output are determined exclusively by forces of demand and
supply.
 Imperfect Competition
In other markets, one or more of the assumptions of perfect competition will not be met; thus, the
market becomes imperfectly competitive.

Different types of imperfectly competitive market:

Monopoly- exists when a single firm that sells in the market has no close substitutes. The existence
of a monopoly depends on how easy it is for consumers to substitute the products for those of other
sellers.
Monopoly can exist for the following reasons:
 A single seller has control of entire supply of raw materials
 Ownership of patent or copyright invested in a single seller.
 The producer will enjoy economies of scale, which are savings from a large range of outputs.
 Grant of a government franchise to a single firm.
 Monopolistic Competition
One imperfectly competitive is monopolistic competition wherein products are differentiated
and entry and exit are easy.

The market combines some characteristics of perfect competition and monopoly key
characteristics are:
 A blend of competition and monopoly
 Firms sell differentiated products, which are highly substitutable but are perfect substitutes
 Many sellers offer heterogeneous or differentiated products, similar but identical and satisfy
the same basic need
 There is a free entry and exit in the market that enables the existence of many sellers; and
 It is similar to a monopoly in that the firm can determine characteristics of product and has
some control over price and quantity
Oligopoly- is a market dominated by a small number of
strategically interacting firms. Its characteristics are:
 Action of each firm affects other firms; and
 Interdependence among firms

Oligopolies may exist due to the existence of barriers, which

may include economies of scale, reputation of the sellers, and
strategic and legal barriers such as the grant of
patents/franchises, loyal following of customers, huge capital
investments and specialized input, and control of supply of raw
materials by a few producers.