CHAPTER 3

ELASTICITY
LEARNING Calculate price

OUTCOME
01 elasticity of demand,
discuss its concept &
determinants.

02 Calculate and
interpret income
elasticity of demand

03
Calculate and
interpret cross
elasticity of demand

04
Calculate price
elasticity of supply,
discuss its concept
and determinants
INTRODUCTION
 ELASTICITY OF
DEMAND
Definition:

Price elasticity of demand measures the degree of

responsiveness of the quantity demanded for a
particular good, with respect to the changes in the
price.
FORMULA
εd = %Δ Quantity Demanded
%Δ Price

εd = Qn – Q0 x P0_____
Q0 Pn – P0
 DEGREE OF
RESPONSIVENESS IN PED
Perfectly elastic
Ɛd = ∞
Elastic
Perfectly inelastic
∞ >Ɛd>1
Ɛd = 0 Unitary elastic
Inelastic Ɛd = 1
0 <Ɛd< 1
 The following table shows the relationship between product X and product Y

EXAMPLE and consumer’s income.

QUESTION Price of
product X per
Quantity
demanded of
Quantity
demanded
for
Consumer’s
income per
unit (RM) product X (units) month (RM)
product Y (units)
20 1000 2500 4000
40 900 2000 6000
60 800 1500 8000
80 600 1000 10000
100 400 500 12000
Calculate the price elasticity of demand for Good X when its price increases from
RM60 to RM80 per units. Is the price elastic or inelastic?
 FACTORS INFLUENCING PED

Availability of substitutes Consumer’s habits

Proportion on income spent Time Frame

on a product

Nature of goods Level of income

(Necessities vs Luxuries)
INCOME ELASTICITY OF
DEMAND (IED)
Definition:
► Income elasticity of demand measures the
degree of responsiveness for a particular
good, when income of the consumer
changed.

► Income elasticity of demand is calculated

to determine the type of the particular
good, whether it is a normal, a luxury or
an inferior good.
 FORMULA
εY = %Δ Quantity Demanded
%Δ Income

ε d = Qn – Q 0 x I0_____
Q0 In – I 0
 TYPES OF GOOD

1
Luxury goods
2
Normal goods

3 4
Necessities goods Giffen / Inferior goods
 The following table shows the relationship between product X and product
Y and consumer’s income. EXERCISE
QUESTION
Quantity
Price of product Quantity demanded Consumer’s income
demanded for
X per unit (RM) of product X (units) per month (RM)
product Y (units)
20 1000 2500 4000

40 900 2000 6000

60 800 1500 8000

80 600 1000 10000

100 400 500 12000

a. Calculate income elasticity of good X and Good Y when consumer income

increases from RM6000 to RM10000 per month.
 CROSS ELASTICITY OF
Definition:
DEMAND (CED)
► Cross-elasticity of demand measures the degree of
responsiveness of the quantity demanded for a particular good
when price of other good changed.
► Cross-elasticity of demand is calculated to determine the
relationship of both products, whether or not they are
complements, substitutes or not related at all.
 FORMULA
εX = % Δ Quantity Demanded of good X
% Δ Price of good Y

εx = Q –Q P
xn x0 x y0

Q P –P
x0 yn y0
TYPES OF GOODS
Negative cross-elasticity, (Ɛx< 0)

complementary goods

Zero cross-elasticity, (Ɛx = 0)

no relationship

Positive cross-elasticity, (Ɛx>0)

substitute goods
 EXAMPLE QUESTION
The following table shows the relationship between product X and product Y and consumer’s income.
Quantity
Price of Quantity Consumer’s
demanded for
product X per demanded of income per
product Y (units)
unit (RM) product X (units) month (RM)
20 1000 2500 4000

40 900 2000 6000

60 800 1500 8000

80 600 1000 10000

100 400 500 12000

Calculate cross elasticity of demand for Good Y when price of Good X decrease from RM100 to RM80.
What is the relationship between these 2 goods?
ELASTICITY OF
SUPPLY
Definition:

► Price elasticity of supply measures

the degree of responsiveness of the
quantity supplied when the price
changed.
 FORMULA
ε = %Δ Quantity Supplied
ss
% Δ Price

ε = Qn – Q0 x
SS
P0 Q0 Pn – P0
DEGREE OF RESPONSIVENESS IN PED

PERFECTLY PERFECTLY ELASTIC

ELASTIC INELASTIC
Ɛs>1
Ɛ s= ∞ Ɛ s= 0

INELASTIC UNITARY
ELASTIC
0 <Ɛs< 1
Ɛs= 1
FACTORS INFLUENCING PES

Time frame Availability of Surplus capacity Perishables vs

inventory non perishables

Mobility and Ease of entry into Level of

availability of the market technology
resources
THANK YOU