Topic 4 : Elasticity of Demand and Supply

ELASTICITY
- Measure of how much buyers and sellers respond to changes in market conditions / a
measure of the responsiveness of quantity demanded or quantity supplied to one of its
determinants.
- An economic concept used to measure the change in the aggregate quantity demanded
of a good or service in relation to price movements of that good/service.
- Measure of the change in one variable in response to a change in another, and it’s
usually expressed as ration/percentage.
In economics, elasticity refers to variables such as supply, demand, income, and price.
Elastic means that a product is considered sensitive to price changes. It has greater percentage
in change in quantity supplied/demanded. (ex. Softdrinks, cereal, clothing, electronics, cars)
Inelastic means that a product is not sensitive to price movements. it has smaller percentage
change in quantity supplied/demanded. (ex. Life-saving machine, gas, electricity, cigarettes,
post-secondary education)
ELASTICITY OF DEMAND
- Measures how responsiveness the quantity demanded is affected by a price change.
- Describes how changes in the cost of a product/service affect a company’s revenue.
Demand can be classified as elastic, inelastic or unitary. An elastic demand is one in which the
change in quantity demanded due to a change in price is large. An inelastic demand is one in
which the change in quantity demanded due to a change in price is small.
Overall, price elasticity measures how much the supply/demand of a product changes based on
a given change in price.
TYPES OF ELASTICITY DEMAND
1. Price Elasticity of Demand (PED) measures the change in demand for a good in response
to a change in its price.
- measures the degree of responsiveness of the quantity demanded of a commodity to
change in its price. Thus its measure depends upon comparing the percentage change in
the price with the resultant percentage change in the quantity demanded
% change in quantity demanded
PED =
% change in price

2. Cross Elasticity of Demand (XED) measures the change in demand for a good in response
to a change in the price of another/substitute good.
- economic concept that measures the responsiveness in the quantity demanded of one
good when the price for another good changes.
Topic 4 : Elasticity of Demand and Supply

- cross elasticity of demand for substitute goods is always positive because the demand
for one good increases when the price for the substitute good increases.

% change in quantity demanded for good

XED = A
% change in price of good B

3. Income Elasticity of Demand (YED) measures the change in demand for a good in
response to a change in the buyer’s income.
- is an economic measure of how responsive the quantity demand for a good or service is
to a change in income. The formula for calculating income elasticity of demand is the
percent change in quantity demanded divided by the percent change in income

% change in quantity demanded

YED =
% change in income

4. Advertising/Promotion Elasticity of Demand (AED) measures the market’s sensitivity to

increases or decreases in advertising saturation. It also measures the advertising
campaign’s effectiveness in generating new sales.

% change in quantity demanded

AED =
% change in advertising expenditures

ELASTICITY OF SUPPLY
- responsiveness of producers to changes in the price of their goods or services.
- if prices rise so does the supply.
- as the ratio of measured proportionate change in the quantity supplied to the
proportionate change in price.
There is a quantitative correlation between the price of a commodity.
It also measures the responsiveness to the supply of a good or service after the change in its
market price.
Basic Economic Theory
The supply of a good will increase when its price rises.
The supply of a good will decrease when its price decreases.
Topic 4 : Elasticity of Demand and Supply

Value of Elasticity Coefficient Mean

Valu Elasticity Meaning

e
∞ Perfectly Elastic An increase in variable B causes variable A to drop to zero, a
decrease in variable B causes carriable A to go to infinity.

>1 Relatively Elastic % Change in variable A is greater than the change in variable
B.

1 Unitary Elastic % Change in variable A is the same as the change in variable

B.

<1 Relatively Inelastic % Change in variable A is less than the change in variable B.

0 Perfectly inelastic Variable A is unaffected by changes in variable B.

1. Perfectly Elastic Supply:

If there is infinite elasticity, then it is considered a perfectly elastic supply. In this scenario, with
a minor fall in the price level, the supply will become zero and with a minor rise in the price, the
supply will become infinite. The perfectly elastic supply example is that in such a market the
suppliers desire to supply any quantity of the commodity if there is a higher level of price. A
perfectly elastic supply curve is depicted as a straight line that is parallel to X-axis. 
2. Unit Elastic Supply:
If the change amount supplied is exactly equal to the change in its price, then it is termed as
unit elastic supply or unitary elastic supply. In the above-mentioned scenario, the price
elasticity of supply is equal to 1.
3. Relatively Greater-Elastic supply:
Relatively greater elastic supply occurs when the change in supply is relatively greater as
compared to the change in price. In this case, the value of price elasticity of supply is greater
than 1.
4. Relatively Less-Elastic supply:
Relatively Less Elastic supply occurs when the change in supply is relatively lesser as compared
to the change in price. In this case, the value of price elasticity of supply is less than 1.
5. Perfectly Inelastic Supply
Topic 4 : Elasticity of Demand and Supply

A service or commodity is termed as perfectly inelastic when a certain quantity of the said
commodity can be supplied irrespective of the price. The value of the price elasticity of supply is
zero.