Elasticity of Demand and Supply

Elasticity of
Demand and
Supply
Define Elasticity
LEARNING Identify the Different KInds of

Elasticity
OBJECTIVE
S Explain and cite examples of the
different types of elasticity.
Elasticity
It is a measure used in response to changes in the determinants of demand and
supply
Price Elasticity Income Elasticity Cross Elasticity
A measure used in The percentage change The percentage change

determining the in quantity compared to in quantity of one good
percentage change in the percentage change compared ro the
quantity against the in income, percentage change in
percentage change in the price of related
price. goods.
Price elasticity of demand -is the percentage change in the quantity demanded of
a good or service divided by the percentage change in the price.
ep=|%∆QD | %∆QD = Q2 –Q1

X 100
%∆P (Q2 + Q1)/2
%∆P = P2 –P1
X 100
(P2 + P1)/2
TYPES OF ELASTICITY
Elastic Inelastic Unitary
Demand may be elastic when a When a percentage when a When a percentage change in
percentage price leads to a percentage change in price price leads to proportionately
proportionately greater results in a proportionately lesser equal percentage change in
percentage change in quantity change in price evokes less than quantity demanded. The
demanded. The elasticity one percentage in quantity coefficient of elasticity is =1
coefficient is >1. demanded. The coefficient <1
Perfectly Elastic Perfectly Inelastic

At a given price, percentage A percentage in price creates no
change in quantity demanded can change in quantity demanded.
change infinitely. There is no change in the quantity
demand. The coefficient is 0
P1 P1
ELASTIC
INELASTIC
P2
P2
Q1 Q2 Q1 Q2
P P
P1
UNITARY D
D
P2
Q1 Q2
PERFECTLY ELASTIC
PERFECTLY INELASTIC
Elsie likes to go to the Ocean Park. At a previous price of P 300. she used to go four (4) times each
month. Now that the price has become P500, she only goes twice a month. What is the price elasticity of
this good?
%∆QD = Q2 –Q1
X 100
(Q2 + Q1)/2
%∆QD = 2 –4 X 100
Where: (2 + 4)/2
= -66.67%
Q1= 4
Q2=3 %∆P = P2 –P1 X 100
P1=300 (P2 + P1)/2
P2=500
%∆P = 500 –300 X 100 =50%
(500 + 300)/2
ep=|%∆QD |
ep=|%∆QD | X 100
%∆P %∆P
ep=|-66.67 | =1.33
50
Influences on the price elasticity of demand
Availability of substitutes – The demand Necessities versus luxuries –

for a good is elastic if a substitute for it is Necessities tend to have
easy to find. The demand for a good is inelastic demands, whereas
inelastic if a substitute for it is hard to luxuries have elastic demands.
find. Goods with close substitutes tend
to have more elastic demand because it
is easier for consumers to switch from
that good to others.
Influences on the price elasticity of demand
Proportion of income spent - The greater Time horizon – Goods tend to

the proportion of income spent on a have more elastic demand over
good, the greater is the impact of a rise longer time horizons.
in its price on the quantity of the good
that people can afford to buy and the
more elastic is the demand for the good.
Cross price elasticity of demand – this is a measure of responsiveness of
demand for a good to a change in the price of a substitute or a complement when other things remain
the same.
Example:
QA1= 500 PB1= P10.00
Ec =%∆Qd of Good A QA2= 600 PB2= P15.00
% ∆ in Price of Good B
Where:
QA= Quanrtity demanded of Good A
PB= Price of Good B
Example: PB2-PB1
% ∆ in Price of Good B=
QA1= 500 PB1= P10.00 PB1
QA2= 600 PB2= P15.00 = 15-10
10
Ec =%∆Qd of Good A
% ∆ in Price of Good B = 5
10
%∆Qd of Good A = QA2-QA1 = 0.5

QA1
= 500-600
200
Ec =%∆Qd of Good A = 0.2
= 100 0.5
% ∆ in Price of Good B
500
Ec= 0.4
= 0.2
If the coefficient of cross elasticity is positive,
Goods A and B are substitutes.
On the other hand, if cross elasticity is negative,

Goods A and B are complements.
Income Elasticity– The coefficient of income elasticity measures a product’s percentage
change in quantity as ratio of the percentage change in income which is caused the change in quantity,
Example:
Income Quantity Demanded
P1000 200
P2000 800
Example:
Income Quantity Demanded
I1=P1000 Q1=200
I2=P2000 Q2=800
Ei =%∆QD
% ∆ Income %∆I = I2 –I1
I1 Ei =%∆QD = 3
%∆QD = Q2 –Q1 % ∆ Income 1
= 2000–1000
Q1 1000
Ei= 3
= 800–200 = 1000
200 1000
= 600 =1
200
=3
Price Elasticity of Supply– is also the response of quantity offered for sale for
every change in price,
%∆QS = Q2 –Q1 X 100

(Q2 + Q1)/2
es=%∆QS
%∆P = P2 –P1 X 100
%∆P (P2 + P1)/2
Influences on the price elasticity of supply
Production possibilities – If the firm has Storage possibilities - The elasticity of supply
plenty of spare capacity or available of a good that cannot be stored (for example,
resources to produce goods, the a perishable item such as fresh strawberries)
business can increase output in depends only on production possibilities. But
response to a change in demand. These the elasticity of supply of a good that can be
goods will have an elastic supply. If the stored depends on the decision to keep the
firm has scarce resources, or does not good in storage or offer it for sale. A small
have much spare capacity, goods will price change can make a big difference to this
have an inelastic supply. Additionally, as decision, so the supply of a storable good is
time passes after a price change, it highly elastic. The cost of storage is the main
becomes easier to change production influence on the elasticity of supply of a
plans and supply becomes more elastic storable good.
Influences on the price elasticity of supply
Technology – The innovation of technology also affects the elasticity of supply

in some industries. Innovation tends to make goods or services more elastic.
When there is innovation in technology, it leads to efficiency in the production
of goods and services. Therefore, an increase in price increases the output by
a greater factor because a company is able to produce more for a smaller raw
materials cost.
Friday’s Tavern sells alcoholic drinks and bar food to young workers in the area. Part of their
ingredients for their bar food is beef, and they buy 10 kilos of beef daily. One day, the price of beef
increased from P250 to P300 per kilo. The management decided that they will now buy only eight kilos
of beef, %∆QS = Q2 –Q1
X 100
(Q2 + Q1)/2
%∆QS = 8 –10 X 100

Where: (8 + 10)/2
= -22.22%
Q1= 10
Q2=8 %∆P = P2 –P1 X 100
P1=250 (P2 + P1)/2
P2=300
%∆P = 300–250 X 100 =18.18%
(300 + 250)/2
es=%∆QS
es=%∆QS =-22.22% =-1.22
%∆P 18.18
%∆P

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Elasticity of

LEARNING Identify the Different KInds of

Price Elasticity Income Elasticity Cross Elasticity

A measure used in The percentage change The percentage change

ep=|%∆QD | %∆QD = Q2 –Q1

Perfectly Elastic Perfectly Inelastic

Availability of substitutes – The demand Necessities versus luxuries –

Proportion of income spent - The greater Time horizon – Goods tend to

%∆Qd of Good A = QA2-QA1 = 0.5

On the other hand, if cross elasticity is negative,

%∆QS = Q2 –Q1 X 100

Technology – The innovation of technology also affects the elasticity of supply

%∆QS = 8 –10 X 100

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