The Concept of Elasticity

Elasticity – In general, it is defined as the ratio of the

percentage change in one variable to the percentage
change in another variable.
Demand Elasticity – is a measure of the degree of responsiveness of quantity
demanded of a product to a given change in one of the independent variable s which
affects demand for that product.

Classification of Demand Elasticity:

1. Price Elasticity of Demand – is the responsiveness of consumers ‘ demand to

change in price of the good sold.

2. Income Elasticity of Demand – is the responsiveness of consumers’

demand to a change in their income.

3. Cross Price Elasticity of Demand – is the responsiveness of demand for a

certain good, in relation to changes in price of other related goods.
or
 DEMAND SCHEDULE
Situation Price (P) Quantity
Demanded (Qd)
(old) A 929 71
B 489 91
C 365 112
(new) D 239 145
E 86 178
F 39 316

Calculate Ed in each of the following: Assume D, B, and C as the new price

and quantity while A, E, and F as old price and quantity.

1. Situation D and A

2. Situation B and E

3. Situation C and F
 DEMAND SCHEDULE
Situation Price (P) Quantity
Demanded (Qd)
A 929 71
B 489 91
C 365 112
D 239 145
E 86 178
F 39 316
 Interpretation of Coefficient of Elasticity

Inelastic Elastic Unitary

Elasticity of Coefficient is Elasticity of Coefficient is Elasticity of Coefficient is

less than 1 (one) greater than 1 (one) equal to 1 (one)

Goods and services for Goods and services that The percentage change in
which there are no have many substitutes price is equal to the
substitutes, or vices which which consumers may percentage change in
are difficult to refrain from switch to quantity demanded

Examples are rice, pork, Examples are clothes,

beef, fish, vegetables, appliances, cars, etc.
medicines, cigarettes
Factors Affecting Demand Elasticity

1. The availability of substitutes – This is probably

the most important factor influencing the
elasticity of a good or service. In general, the
more substitutes, the more elastic the demand will
be .

2. Amount of income available to spend on the

good – This factor affecting demand elasticity
refers to the total a person can spend on a
particular good or service.
Supply Elasticity – A measure of the degree of
responsiveness of supply to a given change in
price. Moreover , it is the percentage change in
quantity supplied given a percentage change in
price. It refers to the response of the sellers to
price changes of goods sold.
or
 SUPPLY SCHEDULE
Situation Price (P) Quantity Supplied
(Qs)
G 898 922
H 745 856
I 623 649
J 577 521
K 369 273
L 208 125

Calculate Es in each of the following: Assume H, K, and I as the new price and
quantity while L, G, and J as old price and quantity.

1. Situation H and L

2. Situation K and G

3. Situation I and J
 SUPPLY SCHEDULE
Situation Price (P) Quantity Supplied
(Qs)
G 898 922
H 745 856
I 623 649
J 577 521
K 369 273
L 208 125
 Interpretation of Coefficient of Elasticity
Inelastic
Elasticity of Coefficient is less
than 1 (one)
A change in price results to a
lesser change in quantity
supplied. This means
sellers/producers have very
weak response to price
change.
Examples are those goods
which cannot be produced
immediately or in short time
like agricultural products
(e.g. coconut which takes 5
years to produce)
Elastic
Elasticity of Coefficient is
greater than 1 (one)
A change in price results to a
greater change in quantity
supplied. This means
sellers/producers are very
responsive to price change.
Examples are those goods
which can be produced
immediately or in short time
like those produced by
manufacturing firms
Unitary
Elasticity of Coefficient is
equal to 1 (one)
A change in price results to an
equal change in quantity
supplied.
Examples are goods classified
as semi-industrial or semi-
agricultural products
Factors Affecting Supply Elasticity:

1. Time – it is a determinant of supply elasticity as producers respond to

changes in prices from time to time, given a certain period of time. Some
producers change the number of supply of their commodities depending
on the movements of prices which shifts from time to time.

2. Time horizon involved in the production process – In the short run, supply
can only be increased in response to an increase in demand or price by
working on the firm’s existing plant more intensively, but this usually adds
only marginally to total market supply. In the long run. However, firms
are able to enlarge their supply capacities by building additional plants so that
supply conditions in the long run tend to be more price elastic.
THANK YOU!