Quantitative Demand

Analysis
Elasticity
THE ELASTICITY
CONCEPT

A measure of the responsiveness of one

variable to changes in another variable; the
percentage change in one variable that
arises due to a given percentage change in
another variable.
For example, the elasticity of your grade
with respect to studying:
OWN PRICE ELASTICITY
OF DEMAND

A measure of the responsiveness of the

quantity demanded of a good to a change
in the price of that good; the percentage
change in quantity demanded divided by
the percentage change in the price of the
good.
Elastic demand: Demand is elastic if the absolute value
of the own price elasticity is greater than 1.

Inelastic demand: Demand is inelastic if the absolute

value of the own price elasticity is less than 1.

Unitary elastic demand: Demand is unitary elastic if

the absolute value of the own price elasticity is equal
to 1.
• Perfectly elastic demand: Demand is
perfectly elastic if the own price elasticity
is infinite in absolute value. In this case
the demand curve is horizontal.
• Perfectly inelastic demand: Demand is
perfectly inelastic if the own price
elasticity is zero. In this case the demand
curve is vertical.
Marginal Revenue and the Own
Price Elasticity of Demand

Marginal Revenue (MR) is the change in total

revenue due to a change in output, and that to
maximize profits a firm should produce where
marginal revenue equals marginal cost.
Elasticity and Total Revenue
TOTAL REVENUE TOTAL REVENUE
= 5 PHP = 8 PHP

1 UNIT = 5 PHP 1 UNIT = 4 PHP 1 UNIT = 4 PHP

FROM ONE OUTPUT INCREASE, MARGINAL

REVENUE =
8-5=3
Factors Affecting the
Own Price Elasticity

• Available Substitutes
• Time
• Expenditure Share
CROSS-PRICE
ELASTICITY

A measure of the responsiveness of the

demand for a good to changes in the price
of a related good; the percentage change in
the quantity demanded of one good divided
by the percentage change in the price of a
related good
• Whenever goods X and Y are
substitutes, an increase in the
price of Y leads to an increase
in the demand for X.

• When goods X and Y are

complements, an increase in
the price of Y leads to a
decrease in the demand for X.
INCOME
ELASTICITY

A measure of the responsiveness of the

demand for a good to changes in consumer
income; the percentage change in quantity
demanded divided by the percentage
change in income.
• When good X is a normal
good, an increase in income
leads to an increase in the
consumption of X.

• When X is an inferior good, an

increase in income leads to a
decrease in the consumption
of X.
 What Is Advertising
Elasticity of Demand (AED)?

Advertising elasticity of demand (AED) is

a measure of a market's sensitivity to
increases or decreases in advertising
saturation. Advertising elasticity is a
measure of an advertising campaign's
effectiveness in generating new sales. It
is calculated by dividing the percentage
change in the quantity demanded by the
percentage change in advertising
expenditures.
Thanks!