How can you describe a rubber band?

THE CONCEPT OF

ELASTICITY
BY: JUDY ANN G. SILVA
 1 Define Elasticity

Classify the Elasticity of

2 Demand

Classify the Elasticity of

CONTENTS 3 Supply

4 Solving Problems
 What is
1 ELASTICITY?
ELASTICITY
is the measure of the
sensitivity of
responsiveness of quantity
demanded or quantity
supplied to changes in
prices (or other factors).

Indicates the extent to

which changes in price (or
other factors) cause
changes in the quantity
demand.
 What is

2 ELASTICITY OF
DEMAND AND ITS
CLASSIFICATIONS?
 T ?
E N
ELASTICITY OF DEMAND E X T
AT
W H
TO
DEFINITION

Indicates the extent to

which changes in price (or
other factors) cause
changes in the quantity
demand.

PRICE ? DEMAN
ELASTIC INELASTIC
DEMAND ELASTICITY MAY BE CLASSIFIED AS:

PRICE ELASTICITY OF
1
DEMAND

INCOME ELASTICITY OF
2
DEMAND

CROSS ELASTICITY OF
3
DEMAND
PRICE ELASTICITY OF DEMAND
EQUATION FORMULA
DEFINITION
Ep= Percentage change in is used to determine
quantity demanded the responsiveness of
demand to changes in
Percentage change in the price of the
price commodity.

= QD2-QD1/QD1
P2-P1/P1
 Remember:
If Price Elasticity of Demand is
• Greater than 1 (Elastic Demand)
• Less than 1 (Inelastic Demand)
• Equal to 1 (Unitary Demand)
ELASTIC DEMAND

a type of demand where the

quantity that will be bought is
affected greatly by the changes
in the price.

Goods which are elastic are goods

with many substitutes and a very
competitive market. (ex: softdrinks)
pepsi vs. coca cola
PROBLEM

If the price of a daily newspaper

increases from $1.00 to $1.20,
and the daily sales falls from
500,000 to 250,000. What is the
price elasticity of demand?
 QD1= 500,000 P1= $1.00
QD2= 250,000 P2= $1.20

Ep= QD2-QD1/QD1
P2-P1/P1
= 250,000-500,000/500,000
1.20-1.00/1.00
= -0.5
0.2
= - 2.5 or 2.5 ELASTIC DEMAND
note: disregard the negative sign. Get the absolute value only.
INELASTIC DEMAND

type of demand where a

percentage change in price
creates a lesser change in
quantity demanded.

Goods which are inelastic are goods

with no substitutes and a little
competitive market.
PROBLEM

If the price of a gasoline

increases from 40 pesos per liter
to 45 pesos, and daily sales falls
from 5000 liters to 4500 liters.
What is the price elasticity of
demand?
 QD1= 5,000 P1= 40 pesos
QD2= 4,500 P2= 45 pesos

Ep= QD2-QD1/QD1
P2-P1/P1
= 4,500 - 5,000/ 5,000
45 - 40 / 40
= -0.1
0.125
= - 0.8 or .8 INELASTIC DEMAND
note: disregard the negative sign. Get the absolute value only.
UNITARY DEMAND

in this type of demand, a change in price

creates an equal change in quantity.
PROBLEM

If the price of mango increases

from 50 pesos per kilo to 60
pesos per kilo , and the daily
sales falls from 100 kg to 80 kg .
What is the price elasticity of
demand?
 QD1= 100 kg P1= 50 pesos QD2=
80 kg P2= 60 pesos

Ep= QD2-QD1/QD1
P2-P1/P1
= 80 - 100 / 100
60 - 50 / 50
= -0.2
0.2
= - 1 or 1 UNITARY DEMAND
note: disregard the negative sign. Get the absolute value only.
INCOME ELASTICITY OF DEMAND
EQUATION FORMULA
DEFINITION
Ep= Percentage change in refers to the
quantity demanded determination of the
responsiveness of
Percentage change in demand to a change
income in consumer income.

= QD2-QD1/QD1
Y2-Y1/Y1
 Remember:
If Income Elasticity of Demand is
• Greater than 1 (Elastic Demand)
• Less than 1 (Inelastic Demand)
• Equal to 1 (Unitary Demand)
PROBLEM
The monthly minimum wage
increases from 12,000 pesos to
15,000 pesos. Sales from chocolates
increases from 10,000 bars to 12,000
bars for a month. What is the income
elasticity of demand?
 QD1= 10,000 bars Y1= 12,000 pesos
QD2= 12,000 bars Y2= 15,000 pesos

Ep= QD2-QD1/QD1
Y2-Y1/Y1
= 12,000 - 10,000 / 10,000
15,000 - 12,000 / 12,000
= 0.2
0.25
= .8 INELASTIC DEMAND
note: disregard the negative sign. Get the absolute value only.
CROSS ELASTICITY OF DEMAND

is the responsiveness of the

quality demanded of a particular
good to changes in the price of
another goods.

The demand for a certain good may

be affected also by a change in the
price of another good. From the
economic stand point.
CROSS ELASTICITY OF DEMAND
DEFINITION
EQUATION FORMULA
Substitute goods
The cross elasticity
of demand for
Ep= Percentage change in product A relative to
quantity demanded of Product A a change in price of
product B is positive.
Percentage change in
Complimentary
price of Product B Goods
The cross elasticity
= QA2-QA1/QA1 of demand for
product A relative to
PB2-PB1/PB1 change in price of
product B is
negative.
PROBLEM
Let us assume that there two companies in the business
of selling cakes. At present, Goldilocks sells their
chocolate cake at 50 pesos per slice, while Red Ribbon
is able to sell 200 slices of cake per week. In order to
impact the sales of Red Ribbon, Goldilocks has been
decided to decrease the price to 40 pesos per slice which
resulted in decreased sales of Red Ribbon to 100 slices
per week. Calculate the cross-price elasticity of demand
in the case.
QA1= 200 slices PB1= 50 pesos
QA2= 100 slices PB2= 40 pesos

Ep= QA2-QA1/QA1
PB2-PB1/PB1
= 100 - 200 / 200
40 - 50 /50
= -0.5
- 0.2
= 2.5 SUBSTITUTES
PROBLEM

For example, if the price of Cinema

Tickets increases from 350 pesos to
525 pesos, and the demand for Popcorn
decreases from 1000 tubs to 700, the
XED between the two products will be?
QA1= 1000 tubs PB1= 350 pesos
QA2= 700 tubs PB2= 525 pesos

Ep= QA2-QA1/QA1
PB2-PB1/PB1
= 700 - 1000 / 1000
525 - 350/350
= - 0.6
THEY ARE COMPLEMENTS
 What is
3 ELASTICITY OF
SUPPLY?
 T?
ELASTICITY OF SUPPLY TE N
EX
AT
WH
TO
DEFINITION

refers to the
responsiveness of the seller
to change in the price.

PRICE ? SUPPLY
PRICE ELASTICITY OF SUPPLY
EQUATION FORMULA

Ep= Percentage change in

quantity supply
Percentage change in
prices
= QS2-QS1/QS1
P2-P1/P1
 Remember:
If Elasticity of Supply is
• Greater than 1 (Elastic Supply)
• Less than 1 (Inelastic Supply)
• Equal to 1 (Unitary Supply)
New quantity supplied(QS₂)= 18,000 kilos
Old quantity supplied (QS₁)=10,000 kilos
New prices (P ₂)=₱6.00/kilo
Old price (P₁)= ₱5.00/kilo

Elasticity of supply (Es)=

ELASTIC
18,000-10,000/10,000 = 4
SUPPLY
• New quantity supplied(QS₂)= 11,000 kilos
• Old quantity supplied (QS₁)=10,000 kilos
• New prices (P ₂)=₱6.00/kilo
• Old price (P₁)= ₱5.00/kilo

• Elasticity of supply
• (Es)= 8,000-10,000/10,000 =0.5
INELASTIC
SUPPLY
• New quantity supplied(QS₂)= 12,000 kilos
• Old quantity supplied (QS₁)=10,000 kilos
• New prices (P ₂)=₱6.00/kilo
• Old price (P₁)= ₱5.00/kilo
• Elasticity of supply (Es)=
18,000-10,000/10,000 =1
UNITARY
SUPPLY
PRACTICE
Price(in peso) QD(units)
600 11,000
400 22,000

Income(in peso) QD(in kg)

2,500 18
3,500 21
 Price(in peso)` QS(piece)
20 10,000
40 20,000

Old Price New

Price
Commodity Price(Php) Quantity Price(Php) Quantity
Product x 1000 90 1000 100
Product y 900 80 950 45
Thank you ！