BASMIC Group 3

Concept
of
Elasticity
Define elasticity
Explain the elasticity of demand
Discuss the types of elasticity
Differentiate the elasticities of demand: price elasticity, income

elasticity and cross elasticity
Learning Compare point elasticity of demand and arc elasticity of demand
Objectives
Interpret elasticity coefficient
Explain the elasticity of supply
Explain the importance of elasticity in the analysis of the market
Describe the different reactions of suppliers under its elasticity

You may have wondered why there are
goods that you purchase more (less) when
price become less (more) while there are
goods that even if prices become too high
(low), still you purchase the same quantity of
that good.
Elasticity allows to quantify the
differences among markets without
standardizing the units of measurement as
elasticity provides a unit-free measure.
ELASTICITY OF DEMAND
The Law of Demand tells us that we will

buy more of a good and seervice if the price
declines and less when the price goes up. But
how much more or less of a good or service will
you buy given the change in price?
ELASTICITY
The concept of elasticity measures the responsiveness of one
variable to a certain chage of another variable.
there are two significant words:

“measures”, reported as number or coefficient
“responsiveness”, meaning reaction to change.
Thus, any change causes people to react, and elasticity measures this
exent to which the people react. Proportional measures or percentage
chnage in the variables measures the responsiveness of consumers and
producers.
Elasticity, therefore, is the percentage in one variable in relation to the percentage
change in another variable
5 Types
of
Elasticity
Elastic. The percentage of variable x is greater than
percentage change in variable Y. (Ɛ > 1)
Inelastic. The percentage of variable x is less than the

percentage change in variable Y. (Ɛ < 1)
Unitary Elasticity. The percentage change in variable X is

equal to percentage change in variable Y when the
coefficient is equal to 1 (Ɛ = 1)
Perfectly Elastic. Any change in variable Y will have an
infinite effect on variable X. (Ɛ = infinity)
Perfectly Inelastic. Any change in variable Y will have

no effect on variable X. (Ɛ = 0)
Price Elasticity
Price Elasticity measures the
percentage change in quantity
with respect to percentage
change in price. Categories of
price elasticity include price
elasticity of demand and price
elasticity of supply.
Price Elasticity of Demand
The price elasticity of demand measures the
responsiveness of the quantity demanded with respect to its
price. The basic formula use to calculate the coefficient of
price elasticity of demand (PƐD) is:
Price elasticity of demand is the percentage change in
quanitity demanded that occurs with respect to a
percentage change in price.
When measuring a very small change in both the price and
quantity on a demand curve on a particular point, the above
formula is used and is referred to as point elasticity.
Table 4
Hypothetical Data of Point and Arc Elasticity
Points Price of Good x (Px) Quantity Demanded of
Good x (Qdx)
A 4 700
B 5 475
C 9 430
D 12 400
E 15 393
F 20 344
G 26 310
H 30 300
I 39 150
Classifications of Price Elasticity of Demand
Values of price elasticity of demand

ranges from zero to infinity. Price elasticity of
demand is categorized depending upon the
response of quantity demand to a change in price
as follows:
Elastic Demand. A certain good is

price elastic when the elasticity
coefficient is greater than one.
Inelastic Demand. A certain good is

price inelastic when the elasticity
coefficient is less than one.
Unitary Elastic Demand. A certain

good is unitary elastic when elasticity
coefficient is equal to one.
Perfectly Elastic Demand. A good

is perfectly elastic when elasticity
coefficient equals infinity
Perfectly Inelastic Demand. A good

is perfectly inelastic when elasticity
coefficient equals zero.
Determinants of Price Elasticity of Demand
Some goods are more responsive to any

change in price while others are not. Others are
prone to being elastic or inelastic than others.
There are some reasons behind these elasticity
differences:
The importance or degree of necessity of the goods.
The more essential or necessary the goods or services are, the
more inelastic the demand will be. On the other hand, goods and
services that are not very important tend to have an elastic demand.
Number of available substitutes.

The more essential or necessary the goods or services are, the
more inelastic the demand will be. On the other hand, goods and
services that are not very important tend to have an elastic demand.
The proportion of income in price changes.
Demand is inelastic for a product whose changes in prices
seemingly have no effect on the consumer income or budget.
However, any change in price resulting to a substantial effect on
consumers' income has elastic demand.
The time period.

The longer the time period is, the more elastic or inelastic the
demand will be. This is because consumers have enough time to
adjust their buying behavior.
Price Elasticity of Supply
The concept of price elasticity of supply measures the responsiveness of

quantity suplied in response to a percentage change in the price of the
goods. The formula of price elasticity of supply is identical to that price
elasticity of demand only that substitutes supply for demand, as follows:
Classifications of Price Elasticity of Supply
Like demand elasticity, there are five cases of responses of suppliers

to any price changes:
Elastic Supply. A change in

price leads to greater change in
quantity supplied.
Inelastic Supply. A change in

price leads to lesser change in
quantity supplied.
Unitary Elastic Supply. A

change in price leads to an
equal change in quantity
supplied.
Perfectly Elastic Supply. This

occurs when there is no change
in price, and there is an infinite
change in quantity supplied.
Perfectly Inelastic Supply. This

happens when a change in price
has no effect on quantity supplied.
Determinants of Price Elasticity of Supply
The primary determinant of price elasticity of suplly is the time period

involved. Alfred Marshall, a noted economist, distinguished the time
period of supply as follows:
Monetary or Intermediate
In this period upply will be perfectly inelastic and the supply is fixed.
Short-run
In this state, supply is inelastic. the output of production can increase even if
equipment is fixed.
Long-run
In this period, supply is elastic. New firms are expected to enter or the old one may
leave the industry.
Elasticity of Downward Sloping Staright Line
The slope of the curve and elasticity of the curve are seemingly
different. The former depends upon the absolute change in price and
quantity whereas the latter depends upon the percentage change in
quantity.
A straight line demand has
the same slope everywhere.
At point B, midpoint of the
straight line demand curve,
demand is unitary elastic.
Above it, demand is elastic,
while below it, the midpoint
demand is inelastic.
Income Elasticity of Demand
Consumer's income is one
of the important determinants o
demand for godds and services.
The responsiveness of quantity
demanded in response to a
chnage in income is known as the
income elasticity of demand. This
measures the percentae change in
demand over the percentage
change in income.
Cross Elasticity of Demand
The cross elasticity of demand measures the responsiveness
of quantity demanded of a good to a change in the price of
another good.
• Cross elasticity of demand simply measures whether the

good is a substitute or a complementary
• Complementary goods are goods that are used in

conjunction with other goods.
• Substitute goods are goods that can be used in place of

another such that, an increase in price of one good tends to
increase the quantity demanded of its substitute good.
Importance and Application of Elasticity
The concept of elasticity has several applications both

in business and econmic decision-making. Having
knowledge of elasticity helps every policy formulating
body develop and/or formulate appropriate strategies
and programs. It can determine the effect of price
changes on the revenue. Hence, producers can assess
consumer's responsiveness with respect to any change
in the price of commodity.
THANK
YOU!

BASMIC Group 3

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Concept

Explain the elasticity of demand

Discuss the types of elasticity

Differentiate the elasticities of demand: price elasticity, income

Explain the elasticity of supply

Explain the importance of elasticity in the analysis of the market

Describe the different reactions of suppliers under its elasticity

The Law of Demand tells us that we will

there are two significant words:

Inelastic. The percentage of variable x is less than the

Unitary Elasticity. The percentage change in variable X is

Perfectly Inelastic. Any change in variable Y will have

Values of price elasticity of demand

Elastic Demand. A certain good is

Inelastic Demand. A certain good is

Unitary Elastic Demand. A certain

Perfectly Elastic Demand. A good

Perfectly Inelastic Demand. A good

Some goods are more responsive to any

Number of available substitutes.

The time period.

The concept of price elasticity of supply measures the responsiveness of

Like demand elasticity, there are five cases of responses of suppliers

Elastic Supply. A change in

Inelastic Supply. A change in

Unitary Elastic Supply. A

Perfectly Elastic Supply. This

Perfectly Inelastic Supply. This

The primary determinant of price elasticity of suplly is the time period

• Cross elasticity of demand simply measures whether the

• Complementary goods are goods that are used in

• Substitute goods are goods that can be used in place of

The concept of elasticity has several applications both

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