The Concept

of Elasticity
ECON 23 - BASIC MICROECONOMICS
MR. IAN GONZALES - Department of Economics
Elasticity of
Demand
The Concept of Elasticity
In economics, the concept of elasticity
measures the responsiveness of one variable
to a certain change in another variable. Thus,
any change causes people to react, and
elasticity measure this extent to which the
people react. Proportional measure or
percentage change in the variable measures
the responsiveness of consumers and
producers.
The Concept of Elasticity
Elasticity is the percentage change in one
variable in relation to the percentage in
another variable.
Values and Types of Elasticity:
1. ε = 1 unitary elastic, that is when %Δy
=%Δx
2. ε > 1 elastic, that is when %Δy > %Δx
3. ε < 1 inelastic,that is when %Δy <%Δx
4. ε = ∞ perfectly elastic
5. ε = 0 perfectly inelastic
Demand Elasticity
Measures the degree of the consumer’s
responsiveness or reaction to changes on its
selected determinants.
Demand Elasticity
This function shows three combinations:
Qdx and Px, Qdx and I, and Qdx and Pr.
These combination can be used to measure
the responsiveness of quantity demanded
with its price (price demand elasticity),
income (income demand elasticity), and
price of related product (cross price
demand elasticity) respectively.
Price Demand Elasticity
Price Demand Elasticity is the percentage
change in quantity demanded that occurs
with respect to a change in price.
Price Demand Elasticity
It is expected that the price demand
elasticity of demand is negative because
the relationship between price and
quantity demanded is inversely related.
However, it is the absolute value that is
usually taken and the negative sign is
omitted.
Price Demand Elasticity
The only classes of goods which has a price
elasticity of greater than 1 is Veblen and
Giffen goods.
*Veblen Goods
Veblen Goods: Luxury items where demand
increases as price rises, creating an
upward-sloping demand curve, which defies the
typical law of demand.

Thorstein Veblen (19th Century): Introduced the

concept of “Conspicuous Consumption”, describing
how wealthy individuals buy goods to enhance
social prestige, power, and status.
*Veblen Goods
Mindset of Conspicuous Consumption:
1. Purchases driven by perceived wealth and
status rather than practical utility or features.
2. Not only observed among the wealthy; less
affluent individuals also engage in this
behavior to project an image of wealth,
potentially as a psychological response to
poverty.
*Veblen Goods
In modern terms it is often
described as “consumerism” or “brand
consciousness,” emphasizing image
and societal perception over
functionality.
*Giffen Goods
Giffen Goods is a low-income,
non-luxury products that contradict
typical demand theory, with demand
increasing as prices rise and
decreasing as prices fall.
*Giffen Goods
The origin of Giffen Goods coined in
the late 1800s by Scottish economist
Sir Robert Giffen.
These goods are essential, non-luxury
items with few close substitutes.
Demand behavior is driven by limited
alternatives and income constraints.
*Giffen Goods
Both Giffen goods and Veblen goods
defy standard economic theory, but
Giffen goods are essentials for
low-income consumers, while Veblen
goods are luxury items.
Examples of Giffen goods are bread, rice,
and wheat, which often lack substitutes in
similar price ranges.
Elastic Demand
Elastic demand (E > 1)- small change in
price result to a greater change in
quantity demand. For example doubling
the increase in price led to almost three
times increase to its quantity demanded.
Inelastic Demand
Inelastic demand (E < 1)- a percentage change
in quantity demanded is less than the
percentage change in price. For example
doubling the increase in price resulted to half
an increase in quantity demanded. It shows that
consumers are relatively not sensitive to any
change in price. Goods of this type are essential
to the consumers so that it is difficult for them
to be without it.
Unit elastic Demand
Unit elastic Demand (E = 1)- change in price is
equal to a change in quantity demanded.
Perfect elastic Demand
(E = ∞)- if there will be a small increase in the
price, quantity demanded is equal to zero. On
the other hand, if there will be a small decrease
in the price, quantity demanded will increase
without limit.
Perfect inelastic Demand
Perfectly Inelastic Demand (E = 0)- quantity
demanded totally does not respond to any
changes.
 Sample Problem
Mangoes sold at the market has a
price of 100 pesos per kilo. An increase
in the price by 10% causes the demand
to decrease from 10 to 8 kilos.
Compute and interpret the price
demand elasticity.
Given: Q1=10, Q2=8, P1=100, P2=?
Determinants of Price Demand Elasticity
Some goods are more responsive to any change
in price while others are not. Some are prone to
being elastic or inelastic than others. There are
several reasons behind this elasticity differences:
1. The importance or degree of necessity of the
goods. The more essential the good or services,
the more inelastic the demand. Examples are
staple food.
Determinants of Price Demand Elasticity
2. Number of available substitute. Demand for
goods with greater number of substitute are
elastic, while goods with less or no substitute are
inelastic. Power distribution like MERALCO are
good examples.
Determinants of Price Demand Elasticity
3. The proportion on income in price changes.
Demand is inelastic for a product whose
changes in price seemingly have no effect on
the consumer income or budget. However any
change in price resulting to a substantial effect
on consumer’s income has elastic demand.
Determinants of Price Demand Elasticity
4. The time period. The longer the time period
is, the more elastic or less inelastic the demand
will be. This is because the consumers have
enough time to adjust their buying behavior.
Effect on Total Revenue
If there is a price change, it is imperative for a
firm to understand what effect of such change
in price will do on total revenue. Any change in
price will create two effect, to with:
1. Price effect. This refers to increase in price that will
result to positive effect on revenue, and vise versa.
2. Quantity effect. This pertains to an increase in
price that will lead to less quantity sold, and vise
versa.
Effect on Total Revenue
However, because of the indirect relationship
between price and quantity demanded, the two
effect influence total revenue in different directions.
But, in deciding whether to increase or decrease
prices, a firm needs to determine what will be the
net effect. Nevertheless, elasticity presents the
identity that the percentage change in total revenue
is equal to the percentage change in the quantity
demanded plus the percentage change in price.
Effect on Total Revenue
The relationship between the price elasticity of
demand and the total revenue is summarized by
the following discussion:
1. If the price elasticity of demand for a
commodity is elastic, a price increase will make
a total revenue fall, and vise versa.
2. When the price demand for a commodity is
inelastic, price increase will give rise to total
revenue, and vise versa.
Effect on Total Revenue
3. When the price demand elasticity for a good
is unitary elastic, a change in price will not
affect the total revenue.
4. When the price demand elasticity for a good
is perfectly elastic, a price increase create zero
total revenue.
5. When the price demand elasticity for a good
is perfectly inelastic, a price increase cause total
revenue to increase.
Effect on Total Revenue
Total revenue is maximized if the elasticity of
demand is unitary. It is essential to appreciate
that price demand elasticity is not necessary
constant pver all price ranges.
Effect on Total Revenue
Total revenue is maximized if the elasticity of
demand is unitary. It is essential to appreciate
that price demand elasticity is not necessary
constant pver all price ranges.
Cross Price Demand Elasticity
Cross Price Demand Elasticity�measures the
responsiveness of quantity demanded of a good
to a change in the price of another good. Cross
price demand elasticity for complementary
goods is negative (-) while for substitute goods
is positive (+).
Income Demand Elasticity
Income Demand Elasticity�measures the
percentage change in demand over the
percentage change of income.
 Example
Pedro’s income in January was 1000 pesos per
week. In February, his income increased by 20%
and this resulted to an increase in his demand
for pork from 1kilo to 1.5 kilos. Determine the
income demand elasticity for pork and interpret
your answer.
Elasticity of
Supply
Supply Elasticity
Supply Elasticity measures the degree of the
producer’s responsiveness or reaction to
changes on its selected determinant.
Price Supply Elasticity
Price Supply Elasticity measures the
responsiveness of quantity supplied in response
to a percentage change in the price of the
products.
Price Supply Elasticity
Elastic Supply (E > 1)- a change in price leads
to a greater change in quantity supplied. This
only shows that suppliers are sensitive to any
changes in price. Goods that can be produced
immediately by manufacturing firms are of this
type of elasticity.
Price Supply Elasticity
Inelastic supply (E < 1)- a change in price result
to a lesser change in quantity supplies. Manifest
the suppliers are weak in response to any price
changes. This type of elasticity are very common
to agricultural products which take time to
produced.
Price Supply Elasticity
Perfectly Elastic Supply (E = ∞ )- Occurs when
there is no change in price and there is infinite
change in quantity supply.
Price Supply Elasticity
Perfectly Inelastic Supply (E = 0)- This happens
when a change in price has no effect on
quantity supplied. This is very common to fixed
input in production particularly land. Regardless
of any change in price the land brought about
by development, suppliers (developers) cannot
increase the land they will supply.