NOTIONS OF

ELASTICITY
Prepared by:

Kristine Joy Viesca

Razelle Ann Marie Venturillo
Flor Andrea Siladan
Milainna Barrientos
Crislie Impe
Arlyn Mendoza
ELASTICITY
- elasticity is the measurement of the
proportional change of an economic variable in
response to a change in another. It shows how easy
it is for the supplier and consumer to change their
behavior and substitute another good, the strength
of an incentive over choices per the relative
opportunity cost.
 ELASTICITY OF DEMAND

- the elasticity of demand is an economic

principle that measures the extent of
consumer response to changes in quantity
demanded as a result of a price change, as
long as all other factors are equal.
Types of Demand Elasticity

 Price Elasticity of Demand

 Income Elasticity of Demand;
and
 Cross Elasticity of Demand.
 Price Elasticity of Demand
 Price elasticity of demand refers to the
degree of reaction or response of the
buyers to changes in price of goods and
services.
 Buyers tend to reduce their purchases as
price increase and tend to increase their
purchases as price falls.
 There are logical reactions to price
changes.
The price elasticity of demand is the response of the quantity
demanded to change in the price of commodity. It is assumed
that the consumer’s income, tastes, and prices of all other
goods are steady. It is measured as a percentage change in
the quantity demanded divided by the percentage change in
price. Therefore;
Change in Quantity x100
Original Quantity
Ep =
Change in Price x100
Original Price

Change in Quantity Original Price

= x
Original Quantity Change in Price
Types or Degrees of Price Elasticity of
Demand
1. Perfectly Elastic Demand (EP = ∞)
The demand is said to be perfectly elastic if the quantity demanded
increases infinitely (or by unlimited quantity) with a small fall in price or quantity
demanded falls to zero with a small rise in price. Thus, it is also known a infinite
elasticity. It does not have practical importance as it is rarely found in real life.

In the given figure, price and quantity demanded are measured along the Y-axis
respectively. The demand curve DD is a horizontal straight line parallel to the X-axis. It
shows that negligible change in price causes infinite fall or rise in quantity demanded.
2. Perfectly Inelastic Demand (EP = 0)
The demand is said to be perfectly inelastic if the demand remains
constant whatever may be the price (i.e. price may rice or fall). Thus, it is also
called zero elasticity. It is rarely found in real life.

In the given figure, price and quantity demanded are measured along the Y-axis and X-
axis respectively. The demand curve DD is a vertical straight line parallel to the Y-axis. It
shows that the demand remains constant whatever may be the change in price. For
example: even after the increase in price from OP to OP2 and fall in price from OP to
OP1, the quantity demanded remains at OM.
3. Relatively Elastic Demand (EP > 1)
The demand is said to be relatively elastic if the percentage change in
demand is greater than the percentage change in price i.e. if there is a greater
change in demand there is a small change in price. It is also called highly elastic
demand or simply elastic demand. For example:

If the price falls by 5% and the demand rises by more than 5% (say 10%), then it
is a case of elastic demand. The demand for luxurious goods such as car,
television, furniture, etc. is considered to be elastic.

In the given figure, price and quantity demanded are measured along the Y-axis and X-
axis respectively. The demand curve DD is more flat, which shows that the demand is
elastic. The small fall in price from OP to OP1 has led to greater increase in demand
from OM to OM1. Likewise, demand decrease more with small increase in price.
4. Relatively Inelastic Demand (Ep < 1)
The demand is said to be relatively inelastic if the percentage change in quantity
demanded is less than the percentage change in price i.e. if there is a small change in
demand with a greater change in price. It is also called less elastic or simply inelastic
demand.

For example: when the price falls by 10% and the demand rises by less than 10% (say
5%), then it is the case of inelastic demand. The demand for goods of daily consumption
such as rice, salt, kerosene, etc. is said to be inelastic.

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis
respectively. The demand curve DD is steeper, which shows that the demand is less elastic. The
greater fall in price from OP to OP1 has led to small increase in demand from OM to OM1. Likewise,
greater increase in price leads to small fall in demand.
5. Unitary Elastic Demand (Ep = 1)
The demand is said to be unitary elastic if the percentage change in
quantity demanded is equal to the percentage change in price. It is also called
unitary elasticity. In such type of demand, 1% change in price leads to exactly
1% change in quantity demanded. This type of demand is an imaginary one as it
is rarely applicable in our practical life.

In the given figure, price and quantity demanded are measured along Y-axis and X-axis
respectively. The demand curve DD is a rectangular hyperbola, which shows that the
demand is unitary elastic. The fall in price from OP to OP1 has caused equal proportionate
increase in demand from OM to OM1 . Likewise, when price increases, the demand
decreases in the same proportion.
 Income Elasticity of Demand
Income elasticity of demand measures the responsiveness of the
quantity demanded for a good or services to a change in income. It is
calculated as the ratio of the percentage change in quantity demanded to the
percentage change in income.

The coefficient income elasticity measures a product`s percentage change in

quantity as a ratio of the percentage change in income which caused the
change in quantity.

It is computed as:
Percentage change in Equity
ey =
Percentage change in Income

Q2 – Q1
Q1
ey =
Y2- Y1
Y1
Example:
Income Quantity Demanded
P1000.00 200
P2000.00 800

Let:
Q2 = 800 Y2 = 2000
Q1 = 200 Y1 = 1000

• The absolute value of the coefficient of income elasticity is also

a measure of how responsive demand is to change in income.
• If quantity demanded is greater than one income is elastic and
the good is superior.
• If quantity demanded is lesser than one income is elastic and
the good is inferior
• If it is equal to one it is unitary and the good is normal.
 Types of Income Elasticity of
Demand
 High: A rise in income comes with bigger increase in the
quantity demanded.
 Unitary: The rise in income is proportionate to the
increase in the quantity demanded.
 Low: A jump in income is less than proportionate than the
increase in the quantity demanded.
 Zero: The quantity bought/demanded is the same even if
income changes.
 Negative: An increase in income comes with a decrease in
the quantity demanded.
 Cross Elasticity of Demand
- The measure of responsiveness of the demand for a good towards the
change in the price of a related good. It is always measured in percentage
terms.

The coefficient of cross elasticity of demand relates a percentage change in

quantity demanded of Good A in response to a percentage change in the price
of Good B.
Thus:

Percentage change in QD of Good A

ec =
Percentage change in price of Good B

Q2A – Q1A
Q1A
=
P2B – P1B
P1B
Example:

QA1 = 500 PB1 = P10.00

QA2 = 600 PB2 = P15.00

 Goods A and B may be related in two ways: as substitutes

and as compliments. If the coefficient of cross elasticity is
positive, Goods A and B are substitutes. An increase in the
price of Good B will cause consumers to purchase more of
Good A, the substitute good, thus causing the quantity of
Good A to increase.
 On the other hand, if cross elasticity is negative, Goods A
and B are complements and are used together. If the price
of Good B increases, the demand for B and A decreases.
Determinants of Demand Elasticity
1. Closeness of Substitute
The quantity of goods buyers purchase is more likely to fall when prices rise if
similar goods are available. If the price of COD were to rise, people can purchase halibut,
salmon or chicken instead. If the price falls, people can buy COD instead of these goods.

2. The Proportion of Income Spent on the Good

If the buyers spend a larger proportion of their income on a good, they will be forced
to purchase less or else do without many other goods. If the price of automobiles rise,
people would have to cut back on other purchases to continue to buy the same quality of
automobile. Instead , rising prices will lead them to buy older or cheaper cars.

3. Time Elapsed Since the Price Change

As time passes, buyers can find alternative goods or make the adjustments needed
to use alternative goods and reduce their purchases of a good as the price rises. If the
price of fuel oil rises, people can switch to gas or wood furnaces, but they need time to
install the new furnace. Buyers will also not install a new furnace to use an alternative
fuel unless they are certain the price rise is permanent.
Elasticity of Supply
 Responsiveness of producers to changes in the price of
their goods or services. As a general rule, if prices rise so
does the supply.

 Elasticity of supply is measured as the ratio of

proportionate change in the quantity supplied to the
proportionate change in price. High elasticity indicates the
supply is sensitive to change in prices, low elasticity
indicates little sensitivity to price changes, and no elasticity
means no relationship with price.
 Price Elasticity of Supply
The elasticity of supply is also the response of quantity offered
for sale for every change in price. Like the consumers, the suppliers
also respond to price changes.

It is computed with the formula as:

Percentage change in quantity supplied

es =
Percentage change in price

Qs2 – Qs1
Qs1
es =
P2 – P1
P1
To solve for the price elasticity of supply, we let:

Qs2 = 56 P2 = 21.00
Qs1 = 38 P1 = 12.00

Therefore:

56 – 38 18
38 38 0.47
es = = = = 0.62
21 – 12 9 0.75
12 12

Note that the coefficient of price elasticity of supply is positive unlike the price
elasticity of demand. This is so because of the direct proportionality of price and
quantity supplied. What does 0.62 means? This means that for every one percent (1%)
increase in the price, quantity supplied will increase by 0.62 or 62 percent (62%).
Supply curve also exhibits different elasticities depending upon its price elasticity
coefficients. If it is greater than one (1), it is an elastic supply curve. If it is less than
one (1), it is inelastic.
 Types of Elasticity of Supply

1. Perfectly Inelastic Supply

A service or commodity has a perfectly inelastic if a given quantity of it can be
supplied whatever might be the price. The elasticity of supply for such a service or
commodity is zero. A perfectly inelastic supply curve is a straight line parallel to the Y-axis.
This is representative of the fact that the supply remains the same irrespective of the price.
The supply of exclusive items, like the painting of Mona Lisa, falls into this category.
Whatever might be the price on offer, there is no way we can increase its supply.

2. Relatively Less-Elastic Supply

When the change in supply is relatively less when compared to the change in price, we
say that the commodity has a relatively-less elastic supply. In such a case, the price
elasticity of supply assumes a value less than 1.
3. Relatively Greater-Elastic Supply
When the change in supply is relatively more when compared to the
change in price, we say that the commodity has a relatively greater-elastic
supply. In such a case, the price elasticity of supply assume a value greater
than 1.

4. Unitary Elastic
For a commodity with a unit elasticity of supply, the change in quantity
supplied of a commodity is exactly equal to the change in its price. In other
words, the change in both price and supply of the commodity are
proportionately equal to each other. To point out, the elasticity of supply in
such a case is equal to one. Further, a unitary elastic supply curve passes
through the origin.

5. Perfectly Elastic Supply

A commodity with a perfectly elastic supply has an infinite elasticity. In
such case the supply becomes zero with even a slight fall in the price and
becomes infinite with a slight rise in price. This is indicative of the fact that the
suppliers of such a commodity are willing to supply any quantity of the
commodity at a higher price. A perfectly elastic supply curve is a straight line
parallel to the X-axis.
 Determinants of Supply Elasticity
a. The Nature of the Good:
As with demand elasticity, the most important determinant of elasticity of supply is
the availability of substitutes. In the context of supply, substitute goods are those to
which factors of production can most easily be transferred. For example, a farmer can
easily move from growing wheat to producing jute. Of course, mobility of factors is very
important for such substitution.

b. The Definition of the Commodity:

As in the case of demand, elasticity of supply also depends on the definition of the
commodity. The narrowly a commodity is defined the greater is its elasticity of supply. For
example, it is easier for a tailor to transfer resources from producing red skirts to green
skirts than from skirts to men’s trousers.

c. Time:
Time also exerts considerable influence on the elasticity of supply. Supply is more
elastic in the long run than in the short run. The reason is easy to find out. The longer the
time period, the easier it is to shift resources among products, following a change in their
relative prices.
 Effects of Elasticities on Market
Equilibrium
In the course of shifts of the supply and demand curves, the
elasticities of supply and demand may also change respectively.

Some useful principles recorded for several situations are:

1. For demand, the more elastic the new demand is, the less
will be the increase in space, and the greater will be the expansion
of quantity sold.
On the other hand, the less elastic the new demand is, the
steeper the rise in price and less the increase in quantity sold.
2. for supply, the less elastic supply is, the higher the increase
in price and the smaller the quantity increase will be, while the
more elastic supply is, the less will be the increase in price and the
greater the increase in quantity sold.
Thank You!!!